Wall Street has decided to bulk up on Costco (COST 1.47%) stock again. The wholesale retailer's shares are back to beating the market in 2023 despite the fact that sales growth is slowing as people pull back spending in areas like electronics and home furnishings.
Costco's diverse merchandise approach, which includes a heavy proportion of consumer essentials, has helped keep traffic rising at stores. And its rising membership fee income is allowing earnings to hold steady even as peers report declining margins.
But has this good news already been fully reflected in the stock price, or can investors still see good returns from buying shares today? Let's take a closer look.
The latest results
Costco's early June update confirmed a few of the worries that investors had about demand trends. The company's core comparable-store sales figure continued to decelerate in May, with U.S. comps landing at less than 2%, compared to roughly 5% over the last 10 months.
This slump is mainly being driven by lower spending on big-ticket items, which is a problem that many other national retailers have noted in recent quarters. Home Depot, for example, lowered its 2023 outlook after citing weaker average spending levels.
The good news is that Costco is a membership club rather than a simple retailer, and so its earnings are less sensitive to spending shifts like these. That's a valuable trait in any selling environment, and it helps explain why net income is still steadily rising even as rivals like Target are reporting weaker results.
It's all about renewals
Investors will have to wait until September for the next update on renewal trends, but all signs point to continued strength here. Costco members renewed at a blazing 93% last quarter, according to management's late May update. That ties a record high and suggests excellent customer loyalty at a time when many shoppers are looking for lower prices.
This high renewal rate matters for several financial reasons, too. Costco is due to raise its annual fee soon, now that it has been more than five years since its last increase. It will be easier to hike that rate when customer traffic and satisfaction are high. Rising membership income translates directly into Costco's competitive advantage, too, as it allows the club to keep prices lower than peers'.
Expensive for good reasons
Many of these positive factors are reflected in Costco's elevated stock valuation. You'd have to pay nearly 1 times annual sales for the stock, as compared to a price-to-sales (P/S) ratio of 0.7 for Walmart and 0.6 for Target. For context, Costco's P/S ratio has ranged from around 0.6 to 1.25 over the last five years.
The stock almost never seems cheap when compared to retailers with similar profit margins, and that's still true today. But Costco delivers more earnings stability thanks to its membership club operating model. And the company can still enjoy soaring sales trends during consumer spending upswings, as investors saw during the pandemic's height.
Given those positive factors, and Costco's lower valuation as compared to early 2022, the stock still seems likely to generate solid returns for patient investors.
