Please ensure Javascript is enabled for purposes of website accessibility

Here's Why Costco Can Continue Its Growth Streak

By John Ballard – Oct 13, 2021 at 6:13AM

Key Points

  • Despite higher costs, Costco is keeping a lid on price increases to give customers more value.
  • This is leading to higher membership renewal rates.
  • Costco's ability to grow profits while keeping prices low is a big advantage.

Motley Fool Issues Rare “All In” Buy Alert

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

Inflation is driving more consumers to seek lower prices, and that could spell more demand at Costco.

Costco Wholesale (COST -0.37%) capped off fiscal 2021 on a high note, with fourth-quarter revenue rising 17.4% year over year. This increase is well above the consistent high-single-digit growth that Costco delivered before the pandemic. 

Costco's membership renewal rates are trending up despite supply issues impacting the retail industry, as consumers seek more value in this inflationary and unpredictable environment. As a result, this deal rush could point to sustained demand in the near term. The only problem is whether Costco can keep the shelves stocked amid supply shortages to meet shoppers' demand through the holidays.

Two customers going over their shopping list at a warehouse store.

Image source: Getty Images.

Delivering value at the right time

The retail industry has got a lot to deal with right now. Seaports are congested, freight costs are on the rise, and low inventory levels cause more items to be out of stock than normal. Costco is passing some of these costs on to the customer, but the company still keeps prices down on many items, which could help it gain market share in this tight environment. 

Costco reported that its membership renewal rate inched up to 91.3% in the U.S. and Canada for an increase of 0.3 percentage points over fiscal Q3. The worldwide renewal rate also rose by the same amount to 88.7%. This increase stems from higher penetration of its top-tier executive memberships, in addition to improving renewal rates from first-year members. 

Executive members spend $120 annually to shop at Costco, and these customers shop more frequently than other members. Stronger renewal rates should lead to higher demand in the near term.

Costco reported a stellar comparable-sales growth rate of 13.4% for fiscal 2021, excluding gas and currency fluctuation from international sales. This figure speaks volumes about the value Costco is adding for customers, not just in terms of price but also the availability of products relative to its competitors. For example, Costco is stocking toys earlier for the holidays as part of an effort to keep its warehouses full, and it has already chartered three ocean vessels to transport goods between Asia and North America for next year. At the same time, it's selling out of certain items within weeks of getting them in stock.

The high demand helped Costco maintain a healthy operating margin last quarter, with operating profit up 17.9% year over year. This only strengthens the business financially, giving it an edge over other retailers that don't have the resources to acquire new inventory ahead of the holidays. 

Rising inflation is generally going to drive consumers to seek value for essential items, and this is clearly good news for Costco. The increase in the Consumer Price Index in recent months correlates with a small acceleration in Costco's comp sales from July through September, excluding gas and foreign currency. Comp sales were up 8% in July, 9.1% in August, and 9.4% in September. 

Costco is in a great position

Investors shouldn't expect Costco to continue growing at double-digit levels permanently. After all, Costco's adjusted comp sales have already decelerated from 15.1% in fiscal Q3 to 9.4% in fiscal Q4. However, this is still nearly double the comp sales growth rate of 5.1% in the same quarter in 2019. 

Analysts currently expect Costco to report full-year sales growth of 8.4% in fiscal 2022 and 7.4% in fiscal 2023. Earnings per share are expected to grow at a compound annual rate of 9.7% over the next five years. These estimates are consistent with Costco's performance over the last decade. 

Still, the upward trend over the last few months in adjusted comp sales growth shows that Costco could maintain growth above pre-pandemic levels longer than analysts expect. If consumer prices escalate further, Costco would be under as much economic pressure as any other retailer. As long as inflation doesn't get completely out of control, Costco appears to be in a great position to widen its competitive moat and gain market share in the near term.

John Ballard 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 Stock Quote
Costco Wholesale
COST
$528.96 (-0.37%) $-1.96

*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
351%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.

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.