Costco Wholesale (COST 0.17%) is one of the world's most successful retailers today. The king of warehouse retailing has defied the odds in many respects. It delivers sales growth in nearly every economic environment and internationally, and it has successfully adapted to local cultures in markets where many Americentric retail models have failed.
So successful is its business model that investors have come to expect robust earnings reports from Costco, which has probably helped lead to a consistently high P/E ratio. The question for investors is whether the retail stock can still justify its expense.
Just how expensive is Costco?
Costco shares currently trade for around 35 times earnings. This may seem expensive, given that Target, Dollar General, and Dollar Tree trade at lower P/E ratios. Only Amazon and Sam's Club parent Walmart are more expensive, though Walmart has historically sold at a lower multiple than Costco.
COST PE Ratio data by YCharts
Costco has not always maintained such a high P/E ratio. It traded under 30 times earnings for most of the 2010s and even fell to a multiple of 15 during the 2008-09 financial crisis. That marks a stark change from the 2020s, when Costco has maintained a P/E ratio above 30, even during the March 2020 bear market.
That valuation has caused many to deem this stock expensive, and one of those investors is likely Warren Buffett. His company, Berkshire Hathaway, owned Costco for more than 20 years.
But in late 2020, Berkshire's Q3 13-F revealed that the company had sold the entire Costco position, more than 4.3 million shares, despite Charlie Munger's longtime position on Costco's board of directors. At the time, the stock had typically traded for over 40 times earnings.
Does its growth justify its valuation?
The financials have likely helped propel the valuation higher, but the business is slowing down compared to fiscal 2022. In the first quarter of fiscal 2023 (ended Nov. 20), net sales rose 8% year over year to $54 billion. Costco's $1.3 billion in net income grew by only 3% during that time as increasing costs wiped out most of the revenue gains.
During fiscal 2022 (ended Aug. 28), revenue of $227 billion amounted to yearly growth of 16%. Also, the $5.8 billion in net income surged 17% higher over the same period.
At that time, Costco's P/E ratio stayed consistently above 40 and peaked at 49, indicating that investors were pricing that growth into the stock. Moreover, Costco stock reached its all-time high, peaking in April of this year at more than $612 per share. The stock has since fallen by almost one-fourth.
Is Costco too expensive?
Investors can probably find more reasonably priced retail stocks than Costco, even on a relative basis. Indeed, Costco is a notable retail success story, having mastered the art of steady growth under various conditions. The company has shown no apparent signs that that will change.
However, retail investors can find similar growth stories in other companies, stocks they can most likely buy more cheaply. And with Buffett having sold his stake in Costco, investors may be more inclined to follow his lead than add shares.
