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Costco (COST) Up 30% in 1H: How Should Investors Play in 2H?
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Costco Wholesale Corporation (COST - Free Report) , a stalwart in the retail sector, has demonstrated resilience amid market volatility, rewarding investors with substantial returns. The Issaquah, Washington-based company, known for its membership-based warehouse model, has significantly outperformed both its industry peers and the broader S&P 500 index in the first half of the year.
Costco's robust performance can be attributed to its strategic initiatives, effective pricing strategies and consistent growth in membership numbers. These factors have driven impressive sales growth and bolstered investor confidence.
Costco's stock has surged approximately 30.1% year to date, surpassing the industry's 17% rise. Closing at $859.36 as of Jul 2, shy of its 52-week high of $873.96 reached on Jun 18, 2024, the stock shows potential for further upward movement.
Stock Performance
Image Source: Zacks Investment Research
Trading Above 50-Day Moving Average
Technical indicators are supportive of Costco's strong performance. The stock is trading above both its 50-day and 200-day moving averages, indicating robust upward momentum and price stability. This technical strength reflects positive market perception and confidence in Costco's financial health and prospects.
Image Source: Zacks Investment Research
Decoding Costco
Striking the Right Chord With Consumers
Costco continues to be one of the dominant warehouse retailers based on the expanse and quality of merchandise offered. A customer-centric approach, strategic pricing, merchandise initiatives and an emphasis on memberships have helped Costco post consistent sales growth.
Costco’s net sales for May increased by 8.1%, reaching $19.64 billion, up from $18.16 billion in the same period last year. This follows improvements of 7.1% in April and 9.4% in March, reflecting a strong and consistent sales performance over the past few months. Comparable sales for the four weeks ended Jun 2, 2024 advanced 6.4%. This followed an increase of 5.6% in April and 7.7% in March.
Impressive Membership Growth
One of Costco's unique strengths is its membership-based business model. The company boasts high membership renewal rates, often exceeding 90%, which indicates strong customer loyalty and a steady stream of recurring revenues. Membership fees provide a stable income regardless of economic conditions.
Costco's total paid memberships reached approximately 74.5 million by the end of the third quarter of fiscal 2024, marking a 7.8% year-over-year increase. Additionally, membership income saw 7.6% growth in the quarter.
Omnichannel Mantra
Costco's digital and e-commerce initiatives continue to gain traction, contributing to overall sales growth. Total e-commerce sales grew 20.7% during the third quarter of fiscal 2024. Deliveries through Costco logistics rose 28% in the quarter. Costco Next, the curated marketplace, added eight new vendors, bringing the total to 75. App downloads increased 32% year over year, and site traffic jumped 16%, reflecting Costco's successful digital engagement strategies. The expansion of the partnership with Uber Eats to cover all of Canada and 17 U.S. states enhances Costco's delivery capabilities and customer convenience, potentially driving further e-commerce growth.
Enough Liquidity
Costco’s sturdy balance sheet equips it to deal with cyclical downturns and tap growth opportunities. With cash & cash equivalents (including short-term investments of $1,095 million) of $11,499 million at the end of the third quarter of fiscal 2024, Costco looks quite comfortable from the liquidity point of view.
Also, solid cash flow generation allows it to raise dividends consistently. The company generated an operating cash flow of $8,381 million for the 36 weeks ended May 12, 2024. COST’s payout ratio is 29, with a five-year dividend growth rate of 12.6%. The company last raised its quarterly dividend by 13.7%.
Estimate Revision Favoring the Stock
Reflecting the positive sentiment around Costco, the Zacks Consensus Estimate for earnings per share has seen upward revisions. Over the past 30 days, analysts have increased their estimates for both the current and next fiscal year by 0.4% to $16.27 and $17.58 per share, respectively. These estimates indicate expected year-over-year growth rates of 10.8% and 8.1%, respectively.
Image Source: Zacks Investment Research
What May Pull Back the Stock’s Momentum?
With the decline of stimulus-driven spending and persistently high interest rates, the industry finds itself at a pivotal juncture. Inflationary pressures are causing consumers to be more judicious with their disposable income, affecting various merchandise categories and creating hurdles for retailers. The drop in U.S. consumer sentiment in June signals further potential challenges as decreased consumer confidence could lead to reduced spending, exacerbating the industry's struggle.
It is essential to acknowledge the presence of the aforementioned headwinds, which may pose challenges to Costco's stock. Additionally, margins remain a critical area to monitor, with potential concerns stemming from any deleverage in the SG&A rate.
Despite Costco's strong technical performance, there are concerns from a valuation standpoint. Costco is currently trading at a premium compared to its industry peers, such as Dollar General Corporation (DG - Free Report) , Target Corporation (TGT - Free Report) and Ross Stores (ROST - Free Report) .
Costco's forward 12-month price-to-earnings ratio stands at 49.47, significantly higher than the industry’s ratio of 30.73 and the S&P 500's ratio of 21.50. This suggests that investors may be paying a high price relative to the company's expected earnings growth. COST has a Value Score of C.
Image Source: Zacks Investment Research
Should You Stay Invested in 2H?
Costco continues to be a standout performer, driven by its resilient business model, strategic initiatives and strong financial fundamentals. While economic uncertainties pose challenges, Costco's proactive approach positions it well for sustained growth. Potential new shareholders might consider the current valuation before entering, but current stakeholders should maintain their position in this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Costco (COST) Up 30% in 1H: How Should Investors Play in 2H?
Costco Wholesale Corporation (COST - Free Report) , a stalwart in the retail sector, has demonstrated resilience amid market volatility, rewarding investors with substantial returns. The Issaquah, Washington-based company, known for its membership-based warehouse model, has significantly outperformed both its industry peers and the broader S&P 500 index in the first half of the year.
Costco's robust performance can be attributed to its strategic initiatives, effective pricing strategies and consistent growth in membership numbers. These factors have driven impressive sales growth and bolstered investor confidence.
Costco's stock has surged approximately 30.1% year to date, surpassing the industry's 17% rise. Closing at $859.36 as of Jul 2, shy of its 52-week high of $873.96 reached on Jun 18, 2024, the stock shows potential for further upward movement.
Stock Performance
Image Source: Zacks Investment Research
Trading Above 50-Day Moving Average
Technical indicators are supportive of Costco's strong performance. The stock is trading above both its 50-day and 200-day moving averages, indicating robust upward momentum and price stability. This technical strength reflects positive market perception and confidence in Costco's financial health and prospects.
Image Source: Zacks Investment Research
Decoding Costco
Striking the Right Chord With Consumers
Costco continues to be one of the dominant warehouse retailers based on the expanse and quality of merchandise offered. A customer-centric approach, strategic pricing, merchandise initiatives and an emphasis on memberships have helped Costco post consistent sales growth.
Costco’s net sales for May increased by 8.1%, reaching $19.64 billion, up from $18.16 billion in the same period last year. This follows improvements of 7.1% in April and 9.4% in March, reflecting a strong and consistent sales performance over the past few months. Comparable sales for the four weeks ended Jun 2, 2024 advanced 6.4%. This followed an increase of 5.6% in April and 7.7% in March.
Impressive Membership Growth
One of Costco's unique strengths is its membership-based business model. The company boasts high membership renewal rates, often exceeding 90%, which indicates strong customer loyalty and a steady stream of recurring revenues. Membership fees provide a stable income regardless of economic conditions.
Costco's total paid memberships reached approximately 74.5 million by the end of the third quarter of fiscal 2024, marking a 7.8% year-over-year increase. Additionally, membership income saw 7.6% growth in the quarter.
Omnichannel Mantra
Costco's digital and e-commerce initiatives continue to gain traction, contributing to overall sales growth. Total e-commerce sales grew 20.7% during the third quarter of fiscal 2024. Deliveries through Costco logistics rose 28% in the quarter. Costco Next, the curated marketplace, added eight new vendors, bringing the total to 75. App downloads increased 32% year over year, and site traffic jumped 16%, reflecting Costco's successful digital engagement strategies. The expansion of the partnership with Uber Eats to cover all of Canada and 17 U.S. states enhances Costco's delivery capabilities and customer convenience, potentially driving further e-commerce growth.
Enough Liquidity
Costco’s sturdy balance sheet equips it to deal with cyclical downturns and tap growth opportunities. With cash & cash equivalents (including short-term investments of $1,095 million) of $11,499 million at the end of the third quarter of fiscal 2024, Costco looks quite comfortable from the liquidity point of view.
Also, solid cash flow generation allows it to raise dividends consistently. The company generated an operating cash flow of $8,381 million for the 36 weeks ended May 12, 2024. COST’s payout ratio is 29, with a five-year dividend growth rate of 12.6%. The company last raised its quarterly dividend by 13.7%.
Estimate Revision Favoring the Stock
Reflecting the positive sentiment around Costco, the Zacks Consensus Estimate for earnings per share has seen upward revisions. Over the past 30 days, analysts have increased their estimates for both the current and next fiscal year by 0.4% to $16.27 and $17.58 per share, respectively. These estimates indicate expected year-over-year growth rates of 10.8% and 8.1%, respectively.
Image Source: Zacks Investment Research
What May Pull Back the Stock’s Momentum?
With the decline of stimulus-driven spending and persistently high interest rates, the industry finds itself at a pivotal juncture. Inflationary pressures are causing consumers to be more judicious with their disposable income, affecting various merchandise categories and creating hurdles for retailers. The drop in U.S. consumer sentiment in June signals further potential challenges as decreased consumer confidence could lead to reduced spending, exacerbating the industry's struggle.
It is essential to acknowledge the presence of the aforementioned headwinds, which may pose challenges to Costco's stock. Additionally, margins remain a critical area to monitor, with potential concerns stemming from any deleverage in the SG&A rate.
Despite Costco's strong technical performance, there are concerns from a valuation standpoint. Costco is currently trading at a premium compared to its industry peers, such as Dollar General Corporation (DG - Free Report) , Target Corporation (TGT - Free Report) and Ross Stores (ROST - Free Report) .
Costco's forward 12-month price-to-earnings ratio stands at 49.47, significantly higher than the industry’s ratio of 30.73 and the S&P 500's ratio of 21.50. This suggests that investors may be paying a high price relative to the company's expected earnings growth. COST has a Value Score of C.
Image Source: Zacks Investment Research
Should You Stay Invested in 2H?
Costco continues to be a standout performer, driven by its resilient business model, strategic initiatives and strong financial fundamentals. While economic uncertainties pose challenges, Costco's proactive approach positions it well for sustained growth. Potential new shareholders might consider the current valuation before entering, but current stakeholders should maintain their position in this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.