Costco Wholesale (COST -0.55%) has made long-term investors a lot of money over the years. In the last decade alone, the big-box retailer has netted a return double that of the S&P 500. Go back another 10 years, and the stock has provided more than three times the return of the S&P.
Yet, this hot growth stock is now severely underperforming the market. The recent stock market sell-off has pushed Costco down nearly 18% over the last year, while the S&P 500 remains down 8%. Does today's beaten-up pricing make it an opportune time to buy this growth stock?
Let's take a closer look and see.
COST Total Return Level data by YCharts.
What's going on with Costco
Increased spending during the pandemic sent sales for this bulk-goods retailer soaring. But sales are slowing. Since the reopening of the economy, consumers have been spending their money in different ways -- particularly as people reassess their budgets with rising interest rates and high inflation.
Costco's monthly sales report for March 2023 showed a significant slowdown in both e-commerce sales and in-store revenue. Its total sales after accounting for impacts in gasoline prices and currency fluctuations were down 1% compared to the five weeks prior, while e-commerce revenues were down over 12%.
Sales are still up for the 31 weeks that ended April 2, 2023, but many investors saw this recent slowdown as a troubling sign.
Long-term growth outlooks still look solid
Still, I don't personally see it as a cause for alarm. Even though e-commerce sales have slumped in the wake of the pandemic, the company has other areas for growth outside of online shopping.
The retailer now operates in 14 countries after opening its first stores in Sweden and New Zealand in the first quarter of 2023. International sales are leading its revenue growth over the last five weeks, and there is still plenty of opportunity for Costco to enter new international markets or expand its presence in high-performing countries like the UK, Spain, or Mexico in the future.
It also has the opportunity to further grow its Business Centers which directly serve businesses across the country, and add more stores in highly populated states that are performing well.
Not to mention, the company's business model remains relevant no matter what the economy is doing. Since Costco passes its discounted pricing on bulk goods directly to its customers, it's not impacted as heavily by inflation eating into its profit margins as other retailers.
The company can always increase its membership fees to help grow revenue if sales remain sluggish, a plan it has indicated it will do in the near future. But nonetheless, low pricing on its products helps attract and retain members, especially when budgets are tightening.
Is Costco a buy at today's pricing?
Costco's price-to-earnings (P/E) ratio at the time of this writing is 36. This indicates the stock is richly valued, but it's not out of line compared to its closest competitors.
COST P/E Ratio data by YCharts.
Costco is a company with a long history of delivering value. It's consistently operated in the best interest of the company and its shareholders. With that kind of reliability, it's no surprise the company trades for a slight premium.
Short-term headwinds may hinder its rate of growth compared to the last decade, but I personally feel Costco is still a worthwhile buy for long-term investors seeking reliability. Those seeking bigger growth or higher dividend yields could benefit from investing their money in other quality stocks that are trading at less of a premium, though.
