Costco Wholesale (COST 1.01%) has been a terrific stock for long-term shareholders, delivering a total return of approximately 2,300% over the past 25 years. However, the past 15 months haven't been very rewarding. Costco stock peaked just above $600 in April 2022. Since reaching that all-time high, the shares have fallen by 13%, compared to a modest 2% decline for the broader market.
Perhaps this pullback shouldn't be too surprising. After all, sales growth is moderating after several years of torrid growth, and Costco stock had nearly doubled in the 13 months before it reached its all-time high. Nevertheless, several key catalysts could launch the shares past $600 to new all-time highs in 2024.
Sales growth could reaccelerate
The COVID-19 pandemic unleashed a wave of rapid sales growth for Costco, due to strong discretionary spending and the impact of inflation on the price of food and other staples.
Excluding the impact of changes in gas prices and exchange rates, the retail giant's comparable sales rose 9.2% in fiscal 2020, followed by 13.4% growth in fiscal 2021 and a 10.6% increase in fiscal 2022. (Each fiscal year ends in late August or early September.)
Comp sales growth remained robust at 7% in the first half of fiscal 2023. But growth has slowed over the past six months, particularly in the U.S., which accounts for well over half of Costco's sales.
|
Month |
Domestic Adjusted Comp-Sales growth |
Global Adjusted Comp-Sales Growth |
|---|---|---|
|
January 2023 |
6.9% |
7.4% |
|
February 2023 |
3.5% |
5% |
|
March 2023 |
0.9% |
2.6% |
|
April 2023 |
2.9% |
4.3% |
|
May 2023 |
1.7% |
3.3% |
|
June 2023 |
2% |
3% |
Source: Costco monthly sales reports. Note: Adjusted comp-sales growth excludes the impact of currency and gasoline price fluctuations.
Fortunately, sales growth could start to accelerate again soon. First, Costco continues to post robust sales gains in its core food and essentials merchandise categories, providing a solid foundation for future growth.
Second, year-over-year comparisons will get much easier over the next few months. For example, last month, Costco was going up against a double-digit comp-sales increase a year earlier.
Third, Costco is one of many retailers that will benefit from an ongoing shakeout in home furnishings retail. Several home furnishings chains are going out of business this year (led by Bed Bath & Beyond), putting billions of dollars of market share up for grabs. Falling home furnishings sales have weighed on Costco's growth in recent months, but market-share gains could support a return to growth in that category later this year.
Pulling the membership fee lever
Historically, Costco has raised its membership fees in the U.S. and Canada every five to six years. The last increase came in June 2017 -- more than six years ago -- but so far, the retailer has wisely held off on raising membership fees. That's likely to change relatively soon.
A $5 increase in the basic membership fee (and $10 increase for executive members) in the U.S. and Canada would lift Costco's bottom line by hundreds of millions of dollars annually. That would provide a meaningful boost to earnings growth over the next two fiscal years.
Image source: Costco Wholesale.
Special dividend on the way?
Finally, Costco's rising cash balance could lead the company to pay a special dividend to investors soon. It pays a very modest regular dividend, which currently yields less than 1%. It also doesn't buy back much stock. Instead, it periodically pays large special dividends to shareholders when it accumulates a lot of excess cash.
Costco ended last quarter with $13.7 billion of cash and short-term investments. It could easily afford to pay a special dividend of around $15 per share, which would represent a total cash outlay of $6.7 billion. That would help remind investors of the company's consistent cash-generation capabilities.
Costco Cash and Short Term Investments (Quarterly), data by YCharts.
Plenty of growth opportunities ahead
Analysts estimate that Costco will surpass $250 billion in revenue in its upcoming 2024 fiscal year. Yet the company has room to grow at an above-average rate for decades to come.
Costco ended last quarter with 852 warehouses worldwide. However, more than 80% of those are in the U.S. and Canada.
Even in those mature markets, Costco keeps finding white space to expand with new warehouses. Meanwhile, the company has just started dipping its toe in the water in massive markets like continental Europe and China. That provides room for the company to double or even triple its warehouse count in the long term.
Costco stock isn't cheap, trading at a forward P/E ratio of nearly 35. But with adjusted comp-sales growth likely to reaccelerate later this year and other catalysts in sight, the shares still look primed to reach new highs beyond $600 in 2024.
