Costco Wholesale (COST 1.01%) experienced a surge in growth over the last three years, as customers shifted their spending to essentials during the pandemic. The stock responded by nearly doubling in value from 2019 through 2021.
But Costco's sales growth is starting to decelerate back to pre-pandemic rates. The stock has fallen 17% since hitting an all-time high of $612.27 last year. Over the last few years, investors have bid up the shares much faster than the actual rate of growth in Costco's revenue and profits, which has made the stock very expensive.
Let's look at Costco's recent sales performance and why investors might want to avoid buying the stock right now.
Costco's recent growth trends
Costco's numbers held mostly steady as inflation crept higher. The company reported sales growth of 16% in fiscal 2022 (which ends in August), with comparable store sales up 14%. Growth was mostly stable with the previous year, when fiscal 2021 comp sales grew 16%.
But since October, Costco's comparable monthly sales have started to weaken. October sales were up 6% year over year, up 4.3% in November, 5.5% in December (which included an extra week of sales), and 5.6% in January.
Keep in mind, these recent sales numbers are more in line with Costco's growth before the pandemic up through fiscal 2019. What seemed to drive the stock up over the last few years was Costco's acceleration in e-commerce sales, which jumped from a 23% increase in fiscal 2019 to 50% in fiscal 2020.
However, Costco's biggest growth driver is starting to weaken. The company's monthly sales reports have revealed e-commerce sales falling in each of the last four months.
| Monthly Sales | Oct. 2022 | Nov. 2022 | Dec. 2022 | Jan. 2023 |
|---|---|---|---|---|
| Total comparable sales | 6% | 4.3% | 5.5% | 5.6% |
| E-commerce | (0.7%) | (10.1)% | (6.4%) | (15.4%) |
Data source: Costco.https://investor.costco.com/news/news-details/2023/Costco-Wholesale-Corporation-Reports-January-Sales-Results/default.aspx
Comparing the competition
There are some factors outside of Costco's control impacting its growth right now. The broader economic headwinds of inflation and rising interest rates are causing weak consumer spending. Some analysts are concerned the economy could dip into a recession this year, which could further weigh on Costco's sales, where it struggled to increase sales in fiscal 2009 during the last recession.
Most concerning, however, is how Costco's e-commerce business compares to competitors. In its most recent quarter, Walmart's U.S. e-commerce sales accelerated over the previous quarter to 16% growth year over year. On the other hand, while BJ's Wholesale Holdings is a smaller warehouse club operator, its digitally enabled sales grew an impressive 43% year over year in the most recent quarter.
It's all about valuation
Considering Costco's decelerating growth, it makes sense to hold off on buying the stock right now. Whether you look at price-to-earnings (P/E), price-to-sales (P/S), or price-to-free cash flow, Costco stock has gotten more expensive than it was five years ago.
Data by YCharts
The only catalyst for Costco in the near term is a potential increase in its membership fee, especially to offset inflationary costs in the supply chain. Costco last raised its fee in fiscal 2017, so it's certainly due for another one.
If the fee is raised by the usual $5, that would raise revenue by roughly $300 million, or less than 1% of annual sales. Since membership fees are highly lucrative for Costco's bottom line, it would have a bigger impact on profits, but perhaps not more than about 5%. Overall, there wouldn't be enough extra growth from a fee increase to support the stock's high valuation.
Should you sell? Investors sitting on large taxable gains may want to sell a small portion of their position. But new investors might want to consider other top stocks that are trading at much cheaper valuations, and therefore, could potentially outperform the market. Either way, I would wait for better prices before buying shares of Costco.
