In the brick-and-mortar retail space, almost no company gets as much respect as Costco Wholesale (COST -0.51%). The membership-based warehouse chain offers a classic example of an economic moat, and it continues to grow through new store openings, comparable sales growth, and its newer e-commerce business.
Costco is a rare retailer that has delivered strong results both during the pandemic and the quarters since the economy reopened, a testament to its ability to bring in customers in a wide range of economic environments. Its stock isn't cheap -- trading at a price-to-earnings ratio of 42 -- but that's reflective of its reputation earned over years of delivering superior results.
That solid performance has helped Costco beat the S&P 500 so far this year. But where will Costco be in another year? The company offered some clues in its fiscal fourth-quarter earnings report earlier this week.
Image source: Motley Fool.
On to the next one
In a difficult environment, Costco delivered solid fourth-quarter results, with comparable sales up 3.8% and adjusted earnings per share of $4.86, up from $4.20, though it benefited from an extra week in the calendar.
Costco doesn't provide guidance in its quarterly reports, but there are a few factors to consider when projecting where the company will be in another year. Arguably, the most important is its membership income. Costco makes the majority of its profits from its members, selling goods near cost in order to drive membership and retention.
Renewal rates remain strong at 92.7% in North America and 90.4% globally, and it finished fiscal 2023 with 71 million paid household members, adding roughly 5.2 million members, or 8% last year. Its store count increased by 3%, showing it continues to improve members per store.
Its executive members, who pay twice as much, are growing even faster and now make up 45% of the membership base and 73% of sales.
Costco is due for a membership fee increase as it's now been over five years since it made the last one, and CFO Richard Galanti indicated on the earnings call that the company would rather wait for the economy to strengthen before it raises fees again. Still, that remains a lever the company could pull, especially if the economy bounces back.
Galanti gave a similar comment on the prospect of another special dividend, saying it was likely a matter of when, not if, but also noting that high interest rates allowed Costco to earn significant interest on the $13.7 billion it has on its balance sheet, making paying a dividend less appealing.
Costco did not discuss new store openings on the call, but the company has 14 store openings listed on its website for the remainder of the calendar year, a sign that openings for the current fiscal year could accelerate from the 23 warehouses it opened last year, finishing with 861 locations.
Image source: Costco.
Where Costco will be next year
Given the state of the economy, investors should expect modest comparable sales growth from Costco as the company noted that spending on big-ticket items had been challenged by inflation and other headwinds on consumer spending, and comparable sales growth seems to have slowed following a boom during the pandemic.
That means investors should temper their expectations for profit growth from Costco, especially without a membership fee increase.
There's also another question that Costco investors need to wrestle with now. The stock's valuation is now well above its historical average, sitting at a price-to-earnings ratio of 42, as the chart below shows.
With the company's growth rate now moderating, the recent surge in Costco stock may be coming to an end. While the stock may not be overvalued yet, it's approaching a range where it seems a fair question to ask.
The company still looks well-positioned for the long term, and investors may want to hold on for that special dividend whenever it comes, but the stock's recent momentum seems likely to fade as we head into 2024.
