Costco Wholesale (COST 1.01%) stock represents a challenge for many investors. The retailer seems like an obvious buy due to its impressive competitive advantages and track record for market-share growth through a wide range of selling environments.
But there are drawbacks to this stock, too, including its relatively low profit margin, modest dividend payment, and high price. Shares are almost never placed on sale relative to peers or the wider market, and that's been the case this year as well.
Against that mixed backdrop, let's take a closer look at the stock to see if the balance has tilted toward buying Costco, selling it, or holding it today.
The growth rebound
The main factor pushing shares higher this year is Costco's rebounding growth trends. Comparable-store sales accelerated to a 5% increase in July, management said in early August. That rate had been 3% in the prior month and was flat for the previous fiscal quarter that ran through early May.
The sales acceleration is occurring on Costco's e-commerce channel, too, which is a great sign for earnings. Demand in that channel is heavily tilted toward consumer discretionary products like jewelry, consumer electronics, and home furnishings.
These items carry higher profit margins. That's why investors are thrilled to see Costco's digital segment grow again after declining sharply through late 2022 into early 2023.
Reasons to hold
There are some potentially better deals around, though, including in the retailing industry that Costco dominates. Walmart, its biggest competitor, is growing nearly as quickly, boasts the same level of profitability, and is valued at a discount on both a price-to-sales and price-to-earnings basis. Income investors will prefer that stock, too, thanks to its higher dividend yield and more generous cash return policies.
Costco, in contrast, has made it clear that it intends to redirect most excess profits and cash into extending its price-advantage lead in the industry. That's the right strategy to maximize its long-term growth potential, but the trade-off is a more modest commitment of cash returns to shareholders.
The final analysis
Customer loyalty is the factor that ultimately drives long-term returns for a retailer, and Costco excels in this area like none of its peers. Last quarter, a record 93% of subscribers chose to renew their memberships, indicating a fantastic commitment to this business during a time of rising inflation. Investors will remember that Costco saw excellent customer traffic throughout the pandemic, too, including when economic growth was plunging and then when it rebounded sharply, as well.
The predictably rising sales and earnings that result from this high customer loyalty are not available elsewhere in the retailing world, especially at the global industry scale that Costco enjoys. That's why the stock doesn't look like a sell today, even though it's valued at 1 times annual sales, compared to Walmart's 0.7 ratio.
Whether to buy or hold is a closer call. Investors might get a chance to own the stock at a better price if markets take a turn lower again in 2023. Yet Costco has consistently earned its premium by winning market share and steadily boosting earnings through its subscription-selling model. As a result, you're likely to see positive returns in buying this stellar business and holding it in your portfolio for the long term.
