Just two weeks ago, Costco Wholesale (COST -1.64%) reported strong earnings results for the final quarter of its fiscal 2020, which ended Aug. 30, beating the analysts' average estimate by 7%. On Wednesday, the warehouse retailer confirmed that its momentum is intact, reporting excellent sales growth for September. The company's rapid market share growth is creating plenty of long-term upside for Costco stock.

Costco's best month yet

In September, Costco's net sales jumped by 16.9% to $16.84 billion on a 15.5% increase in comparable sales. Excluding the impact of gasoline price changes and foreign currency fluctuations, adjusted comp sales soared 16.9% year over year -- the best result the company has achieved in recent memory. For comparison, adjusted comp sales rose by 14.1% last quarter and 9.2% for fiscal 2020 as a whole.

Management noted that Costco got a sales lift of nearly 1 percentage point from holiday timing. That would put its underlying comp sales increase at around 16%.

As has typically been the case recently, a double-digit percentage increase in average transaction size drove most of the sales growth. Traffic increased modestly. Additionally, e-commerce sales rose by about 90%, right in line with the recent trend.

The entrance to a Costco warehouse

Image source: Costco Wholesale.

Core business trends are even better

Costco's strong sales growth is even more remarkable in light of the challenges facing many of its ancillary business lines. Gasoline demand is still down significantly year over year due to the pandemic. The retail giant's legendary food courts are much less busy than usual. Its photo and travel businesses are under pressure, too.

By contrast, comp sales surged more than 20% for three of Costco's four core merchandise groups last month. The fourth merchandise group (softlines) was no slouch either, posting high-teens growth.

Clearly, Costco is benefiting from the fact that people are eating at home more often. Management said that meat, produce, frozen food, and shelf-stable food were some of the strongest merchandise categories in September. It's also gaining share from grocery stores, perhaps because people who are cooking at home more often are better able to buy in bulk.

The stay-at-home environment is helping Costco in other ways, too. Pretty much anything related to people sprucing up their living spaces sold well last month, including major appliances, hardware, consumer electronics, home furnishings, housewares, and small appliances. In these categories, Costco is also gaining share from retailers that are closing stores or disappearing entirely, like Sears and Pier 1 Imports. That could make sales gains in these categories quite durable.

Strength begets strength

As the COVID-19 pandemic (hopefully) eases over the next couple of years, some of the trends that are helping Costco right now will likely reverse. Consumers may cook at home less frequently once they are able to go to restaurants again. People who are upgrading their homes right now may shift their discretionary spending back to travel and other experiences. Thus, it's likely that Costco won't be able to sustain its recent sales growth pace indefinitely.

On the other hand, a recovery in its ancillary businesses should help offset slower growth in Costco's core categories. Moreover, some pandemic-related changes in shopping behavior may stick. For example, the appeal of one-stop shopping could continue to help retailers like Costco that sell both essentials and a wide variety of discretionary items.

If Costco can sustain its recent gains in wallet share, more members will be willing to shell out the extra $60 per year to upgrade to its executive membership tier. That will boost membership revenue, which contributes the bulk of the company's profits.

Costco's stock price reached a new all-time high this week and now trades for about 38 times forward earnings. But between the company's ongoing market share growth, its massive global expansion opportunities, and the potential for margin expansion as it squeezes more sales out of each warehouse, Costco stock remains a solid choice for long-term investors.