Please ensure Javascript is enabled for purposes of website accessibility

Is Costco Stock a Buy After Q3 Earnings?

By Parkev Tatevosian - Jun 6, 2021 at 10:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The warehouse club retailer reported fantastic results, but shares fell anyway.

Costco (COST 1.29%) announced third-quarter earnings on May 27, and it was another impressive quarter for the international retailer. The company has benefited from a surge in spending since it was deemed an essential retailer in the U.S. at the pandemic's onset. 

Fueled by record levels of fiscal stimulus, consumers with limited shopping options have been turning to Costco more than usual. The warehouse club retailer in turn has earned the trust of its members by maintaining inventories of essential items at its famously competitive prices. 

Third-quarter highlights 

Despite delivering solid revenue and earnings growth in the third quarter, Costco stock is down roughly 2% since the company released third-quarter results. Net sales increased by 21.7% from last year, which is better than the 17.5% increase that analysts on Wall Street were expecting. Similarly, Costco reported earnings per share of $2.75, a 45% increase from last year and better than the $2.32 expected by Wall Street.

A woman shopping at a grocery store.

Costco reported net sales growth of 21.7% in the third quarter. Image source: Getty Images.

The market reacted poorly to Costco's results in part because management made permanent the temporary wage increase it implemented during the pandemic. The company began a temporary $2 per hour wage increase at the pandemic's onset to ensure its employees would show up to work. Perhaps up until this announcement, investors had thought the premium wage would be removed once the spread of the coronavirus diminished.

However, shareholders can be consoled because the permanent wage increase will be $1 per hour instead of the $2 per hour Costco had been paying until this quarter.

The outlook

As you may already be aware, Costco operates on a membership model where customers pay an annual fee to gain the privilege of shopping at its warehouses. And as of the end of the third quarter, Costco has 60.6 million paying households. That was an increase of 900,000 from the previous quarter. Moreover, as a sign of how much its customers appreciate the privilege, Costco's membership retention rate in the most recent quarter was 90%.

Costco has two membership tiers: regular and executive, with annual costs of $60 and $120, respectively. Interestingly, the executive membership comes with a 2% cash back on spending benefit that potentially offsets the membership price if you spend $6,000 in a year. The company generally increases prices on its membership every five years. If it stays true to form, the next price increase could be in the coming year.

Costco currently operates 809 warehouses, including 559 in the U.S. and Puerto Rico. With 250 locations outside of the U.S., there is room for international expansion. Still, there is room for domestic expansion as well. The company's business model is clearly one that customers appreciate. Indeed, Costco plans on adding an estimated 21, 25, and 25 net new stores in this and the next two fiscal years, respectively.

Investor takeaway 

Costco is trading at a trailing price-to-earnings ratio of 38. That's near the highest level it has traded for in the last decade. That's not to say it's not a good investment at this price. The market can be anticipating the company's excellent long-term prospects, including the millions of new loyal customers it added during the pandemic, new store growth opportunities, and membership price increases that are likely to be introduced in the next year. 

Investors who buy Costco stock now are likely to find its value to be much higher 10 years from now. Therefore, if you have a long-term mindset, buying Costco stock can be a good idea. 

 

Parkev Tatevosian has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$544.12 (1.29%) $6.91

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.