Where Will Costco Stock Be in 1 Year?

Costco (COST -0.24%) posted a mixed quarterly report on March 2. In the second quarter of fiscal 2023, which ended on Feb. 12, the warehouse retailer's revenue grew 6.5% year over year to $55.3 billion but missed analysts' estimates by $340 million. Its adjusted comparable store sales, which exclude shifting foreign exchange rates and gas prices, rose 7%.

Its net income increased 13% to $1.5 billion, or $3.30 per share, and cleared the consensus forecast by seven cents. Those headline numbers were stable, but Costco's stock dipped after the report and remains down about 10% over the past 12 months. Will this blue chip retail stock head higher by the end of 2023?

Image source: Getty Images.

What happened to Costco over the past year?

Costco's growth accelerated throughout the pandemic as more people stocked up on household goods and groceries. Its comps growth decelerated over the past year as those tailwinds dissipated, but it still generated much stronger top-line growth than many other retailers.

Its growth in total cardholders, which reached 123 million in the second quarter, consistently accelerated over the past year. Its worldwide renewal rate for those members also consistently improved on a sequential basis.

Data source: Costco. YOY = Year over year.

Costco only generated about 2% of its revenue from its membership fees in fiscal 2022, but those high-margin revenues accounted for most of its profits. That foundation enables Costco to consistently sell its merchandise at lower margins than other retailers, which don't charge membership fees.

Furthermore, Costco consistently opened new stores as other retailers shrank their brick-and-mortar footprints. It ended the second quarter with 848 warehouses worldwide, compared to 830 warehouses a year earlier. That scale, along with its bulk sales of products, keeps its prices low and makes it a popular shopping destination during economic downturns.

Over the past year, inflation still curbed Costco's sales of discretionary products like consumer electronics, appliances, jewelry, houseware, and hardware products -- but it largely offset that slowdown with its brisk sales of food, sundries, and pharmacy products. That balance highlights Costco's appeal as an evergreen investment in both bull and bear markets.

Its gross margins are still expanding

Inflation and supply chain disruptions are squeezing the gross margins of many brick-and-mortar retailers, but Costco's gross margin still expanded by eight basis points year over year to 10.72% in the second quarter.

The gross margins for its core merchandise sales declined as it reduced its prices to drive more shoppers to its stores, but it offset that compression with higher margins across most of its ancillary (gas stations, pharmacies, vision and hearing aid centers, travel, and e-commerce) businesses. Within the ancillary segment, only the pharmacy and e-commerce segments posted lower gross margins than the previous year.

Costco should be able to easily maintain that balancing act as long as it continues to gain new members, maintain high renewal rates, and open new stores. It's also widely expected to raise its membership fees -- as it's done every five to six years -- in the near future to offset the costs of its ongoing expansion. 

Where will Costco's stock be in a year?

Costco didn't provide any guidance, but analysts expect its revenue and earnings to rise 8% and 10%, respectively, in fiscal 2023. For fiscal 2024, they expect its revenue and earnings to grow another 6% and 10%, respectively.

Walmart (WMT 0.46%), which owns Costco's competitor Sam's Club, is expected to grow its revenues by just 3% this year as its earnings decline 3%. Costco's smaller competitor BJ's Wholesale (BJ 1.61%) is expected to grow its revenues and earnings by 15% and 16%, respectively, this year.

But at 33 times forward earnings, Costco trades at premium to Walmart and BJ's, which have forward price-to-earnings ratios of 23 and 19, respectively. That higher valuation reflects Costco's aforementioned strengths and the market's bullish expectations, but it could also limit its upside potential as long as investors favor value over growth in this tough market.

Costco is still a great company, but I believe its stock could underperform the S&P 500 this year as investors focus on its higher valuation, slowing comps growth, and declining core merchandise margins instead of its other long-term strengths. But if you plan to hold Costco's stock for at least a few more years, it's not a bad idea to accumulate some more shares today.