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Costco (COST) Stock Up 25% YTD: Is It Still a Good Buy?
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As market turbulence and economic uncertainties dominate headlines, Costco Wholesale Corporation (COST - Free Report) has quietly but steadily delivered a stellar performance. Shares of this Issaquah, WA-based company have appreciated 24.5% year to date, significantly outperforming both its industry peers and the broader S&P 500 index, which have recorded gains of 14.5% and 12.4%, respectively.
Costco’s resilient business model, centered around a membership-based structure, continues to be a major growth driver. The company’s high membership renewal rates, coupled with its efficient supply chain management and bulk purchasing power, ensure competitive pricing and customer loyalty. This robust model has allowed Costco to thrive, even during economic downturns.
Image Source: Zacks Investment Research
This impressive uptick in the stock prompts the question: is there still potential for further growth, or have investors missed the optimal entry point?
Well, technical analysis provides some insights into Costco's current standing. The stock is trading above both its 100-day and 200-day moving averages, suggesting strong upward momentum and price stability. This technical strength reflects positive market sentiment and confidence in Costco’s financial health.
Image Source: Zacks Investment Research
As of Aug 2, Costco’s shares closed at $822.08, below their 52-week peak of $896.67, which was reached on Jul 9, 2024. This recent pullback from the peak may offer a strategic buying opportunity for investors looking to capitalize on potential future gains.
Decoding Potential
Robust Membership Model
Costco's success lies in its membership-based business model, which generates a reliable revenue stream and fosters strong customer loyalty. Members pay an annual fee for access to Costco's warehouses, where they can purchase goods at significant discounts. This model not only ensures a steady inflow of revenues but also creates a sense of exclusivity and value among its members.
The company recently announced an increase in its membership fee, effective Sep 1, 2024. The retail giant will raise annual fees for U.S. and Canada Gold Star, Business and Business add-on members by $5, bringing the total to $65 annually. Executive Memberships will see a rise from $120 to $130 annually, accompanied by an increase in the maximum annual 2% Reward from $1,000 to $1,250. These changes are expected to impact approximately 52 million memberships, with more than half classified as Executive.
In the third quarter of fiscal 2024, the company reported a 7.6% increase in membership fee revenues, underscoring its significance to financial health. Membership fees contributed 1.9% to total revenues and boosted net income, illustrating their pivotal role in COST’s operational strategy.
Pricing Power
Costco's ability to offer products at lower prices than many of its competitors is a major draw for its customer base. By selling items in bulk, the company achieves economies of scale, allowing it to negotiate favorable terms with suppliers and pass the savings on to consumers. This pricing strategy attracts a broad demographic, from budget-conscious families to small businesses, enhancing Costco's appeal across various market segments.
In June, COST reported an impressive increase in comparable sales, achieving 5.3% growth during the five weeks ended Jul 7, 2024. This stellar performance follows consecutive increases of 6.4% and 5.6% in May and April, respectively. Breaking down the figures by region, comparable sales in the United States rose by 5.6%, in Canada by 5.2% and in Other International locations by 4.3%.
Strategic Initiatives
Costco continuously adapts to market trends and consumer preferences. The company regularly updates its product offerings to include a mix of everyday essentials and unique, high-demand items. Through market analysis and tailored offerings, Costco has successfully expanded its presence, both domestically and internationally. The company has been steadily opening new club locations while operating e-commerce sites across various countries, including the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia.
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.
Sufficient 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.
Additionally, 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 quarter by one and three cents to $5.02 and $3.89 per share, respectively. These estimates indicate expected year-over-year growth rates of 3.3% and 11.8%, respectively.
Image Source: Zacks Investment Research
Unlocking Valuation
Costco is currently trading at a premium compared to industry peers, such as Dollar General Corporation (DG - Free Report) , Target Corporation (TGT - Free Report) and Ross Stores (ROST - Free Report) . However, this elevated valuation is not without merit. With a forward 12-month price-to-earnings ratio of 46.87, surpassing the median level of 42.61 observed in the past year, Costco demonstrates its appeal to investors seeking growth opportunities. Moreover, when compared to the industry's forward 12-month P/E ratio of 29.6 and the S&P 500's ratio of 20.76, Costco's higher valuation reflects its position as a standout performer in the market.
Image Source: Zacks Investment Research
Is COST Still a Smart Buy After Recent Gains?
Costco’s impressive year-to-date performance, backed by a robust membership model, strategic pricing and continuous adaptation to market trends, places it in a strong position within the retail sector. While the stock's premium valuation may give some investors pause, Costco's consistent growth, solid financial health and strategic initiatives suggest that there may still be room for further upside. Given the recent pullback from its 52-week peak, investors have a strategic opportunity to invest in this Zacks Rank #2 (Buy) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Costco (COST) Stock Up 25% YTD: Is It Still a Good Buy?
As market turbulence and economic uncertainties dominate headlines, Costco Wholesale Corporation (COST - Free Report) has quietly but steadily delivered a stellar performance. Shares of this Issaquah, WA-based company have appreciated 24.5% year to date, significantly outperforming both its industry peers and the broader S&P 500 index, which have recorded gains of 14.5% and 12.4%, respectively.
Costco’s resilient business model, centered around a membership-based structure, continues to be a major growth driver. The company’s high membership renewal rates, coupled with its efficient supply chain management and bulk purchasing power, ensure competitive pricing and customer loyalty. This robust model has allowed Costco to thrive, even during economic downturns.
Image Source: Zacks Investment Research
This impressive uptick in the stock prompts the question: is there still potential for further growth, or have investors missed the optimal entry point?
Well, technical analysis provides some insights into Costco's current standing. The stock is trading above both its 100-day and 200-day moving averages, suggesting strong upward momentum and price stability. This technical strength reflects positive market sentiment and confidence in Costco’s financial health.
Image Source: Zacks Investment Research
As of Aug 2, Costco’s shares closed at $822.08, below their 52-week peak of $896.67, which was reached on Jul 9, 2024. This recent pullback from the peak may offer a strategic buying opportunity for investors looking to capitalize on potential future gains.
Decoding Potential
Robust Membership Model
Costco's success lies in its membership-based business model, which generates a reliable revenue stream and fosters strong customer loyalty. Members pay an annual fee for access to Costco's warehouses, where they can purchase goods at significant discounts. This model not only ensures a steady inflow of revenues but also creates a sense of exclusivity and value among its members.
The company recently announced an increase in its membership fee, effective Sep 1, 2024. The retail giant will raise annual fees for U.S. and Canada Gold Star, Business and Business add-on members by $5, bringing the total to $65 annually. Executive Memberships will see a rise from $120 to $130 annually, accompanied by an increase in the maximum annual 2% Reward from $1,000 to $1,250. These changes are expected to impact approximately 52 million memberships, with more than half classified as Executive.
In the third quarter of fiscal 2024, the company reported a 7.6% increase in membership fee revenues, underscoring its significance to financial health. Membership fees contributed 1.9% to total revenues and boosted net income, illustrating their pivotal role in COST’s operational strategy.
Pricing Power
Costco's ability to offer products at lower prices than many of its competitors is a major draw for its customer base. By selling items in bulk, the company achieves economies of scale, allowing it to negotiate favorable terms with suppliers and pass the savings on to consumers. This pricing strategy attracts a broad demographic, from budget-conscious families to small businesses, enhancing Costco's appeal across various market segments.
In June, COST reported an impressive increase in comparable sales, achieving 5.3% growth during the five weeks ended Jul 7, 2024. This stellar performance follows consecutive increases of 6.4% and 5.6% in May and April, respectively. Breaking down the figures by region, comparable sales in the United States rose by 5.6%, in Canada by 5.2% and in Other International locations by 4.3%.
Strategic Initiatives
Costco continuously adapts to market trends and consumer preferences. The company regularly updates its product offerings to include a mix of everyday essentials and unique, high-demand items. Through market analysis and tailored offerings, Costco has successfully expanded its presence, both domestically and internationally. The company has been steadily opening new club locations while operating e-commerce sites across various countries, including the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia.
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.
Sufficient 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.
Additionally, 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 quarter by one and three cents to $5.02 and $3.89 per share, respectively. These estimates indicate expected year-over-year growth rates of 3.3% and 11.8%, respectively.
Image Source: Zacks Investment Research
Unlocking Valuation
Costco is currently trading at a premium compared to industry peers, such as Dollar General Corporation (DG - Free Report) , Target Corporation (TGT - Free Report) and Ross Stores (ROST - Free Report) . However, this elevated valuation is not without merit. With a forward 12-month price-to-earnings ratio of 46.87, surpassing the median level of 42.61 observed in the past year, Costco demonstrates its appeal to investors seeking growth opportunities. Moreover, when compared to the industry's forward 12-month P/E ratio of 29.6 and the S&P 500's ratio of 20.76, Costco's higher valuation reflects its position as a standout performer in the market.
Image Source: Zacks Investment Research
Is COST Still a Smart Buy After Recent Gains?
Costco’s impressive year-to-date performance, backed by a robust membership model, strategic pricing and continuous adaptation to market trends, places it in a strong position within the retail sector. While the stock's premium valuation may give some investors pause, Costco's consistent growth, solid financial health and strategic initiatives suggest that there may still be room for further upside. Given the recent pullback from its 52-week peak, investors have a strategic opportunity to invest in this Zacks Rank #2 (Buy) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.