Many Wall Street pros like to measure returns in absurdly short episodes like a quarter or a calendar year. It's anyone's guess where the economy, let alone the stock market, might move in such a compressed period. As a result, there's a constant need to revise, upgrade, and downgrade your short-term targets.
Smart investors can ignore all of that noise and focus on a company's wider outlook, which doesn't change all that much. Costco (COST -0.12%), for example, has been growing its business for decades by keeping prices low. The retailer posts steadily higher earnings, too, thanks to its expanding membership base.
So let's put on our forecasting hats to see where these trends might be pushing the business by 2026.
Higher sales
Costco is highly likely to be setting annual sales records in a few years. Revenue will benefit from its growing base of stores, which is set to expand by 27 in 2023. The real magic occurs in later years, though.
Costco in 2022 averaged just $150 million in annual revenue in its newly opened locations. That figure grows to more than $208 million for stores that have been open for nine years and $261 million for those open 10 years and longer.
Whatever consumer trends develop over the next few years, investors can feel confident that Costco's stores will continue to attract more members and traffic as they mature.
Rising fee income
Costco is highly likely to boost its annual membership fee in this period given its last fee raise was implemented more than five years ago, back in mid-2017. The company hikes fees every five to six years, and those subscriptions power most of its earnings.
The retailer has a strong case to make to its customers about the upcoming increase. Costco's value proposition is most clear when prices are high, as they have been for the past few quarters. And shoppers are clearly enjoying their memberships as a record 92.5% have chosen to renew their subscriptions in mid-2022, management said in the most recent conference call with investors.
Stock returns
As mentioned above, it's harder to forecast where Costco's stock will be in a few years. There's a wide range of potential paths that the economy will take in that time.
Yet Costco is entering the period at a reasonable valuation. Shares are trading for less than 1 times annual sales, down from a pandemic peak of 1.3 times. That discount, along with the positive operating trends detailed above, should set investors up for solid returns when holding this stock.
Sure, economic surprises are a wild card for 2023 and beyond. Consumer tastes have been swinging wildly in recent years, too, and that fact has caused inventory headaches for many peers, including Target (TGT -0.54%). Costco isn't immune to these risks, though its warehouse-selling approach minimizes the challenges.
Through early 2023, Costco shares gained more than 50% in three years compared to the 20% increase in the S&P 500. If anything, its competitive power only increased over that time. That's the best reason to believe the retail stock will likely beat the market over the next three-year period.
