From a bird's-eye view, everything's fine...maybe even great. Club-based retailer Costco Wholesale (COST 1.01%) topped its sales and earnings estimates for the quarter ending in August, and followed that up by reporting 6% sales growth for the month of September: full steam ahead?
But when you dig into the details of the store chain's monthly sales, things may not be so great. A big chunk of last month's top-line growth actually came from the addition of new stores, rather than increased sales at existing stores. Same-store sales in the United States (where Costco does most of its business) were only up 3.2% last month.
That's the second month in a row the pace of growth has fallen, renewing a trend of waning same-store sales growth since 2021's peak. In and of itself, that isn't catastrophic. After all, the COVID-19 pandemic created an unthinkable scenario that was ultimately bullish for the consumer-goods retailer.
Still, the fact that Costco's same-store sales growth is now regularly below pre-pandemic levels is cause for concern.
More than one month's trend
Don't misunderstand: Costco isn't doomed. Its slowing sales growth does raise questions, though.
Before the onset of the pandemic, same-store sales growth was regularly around 5%. It catapulted during (and because of) the pandemic. And, unsurprisingly, comps growth fell back to more normal levels beginning in the latter half of 2021. But it never stopped normalizing: It's now regularly coming in between 3% and 4%, and is still trending lower.
Data source: Costco Wholesale Corp. Chart by author. Sales figures are in billions of dollars.
Also notice that total revenue largely flatlined from the end of last year through August of this year. This long-term sales trend did tick a little higher last month, but it's not clear to what extent higher prices did the heavy lifting. All we know for sure is that the current annualized inflation rate is now 3.7%, while grocery prices are reportedly up 3% over the same time frame.
In theory, this inflation helps Costco, as membership-based, bulk-buying retailers help stretch consumers' dollars. In reality, this inflation may be doing it more harm than good. Costco's customers are making more trips to its stores, but they're ultimately spending less when they get there. The retailer's seeing softness in several big-ticket non-food categories like furniture and electronics.
Two implications
So for current and would-be investors, there are two big takeaways.
The first is the possibility that Costco isn't as inflation-resilient as it's historically been believed to be. The sheer scope of recent inflation isn't just annoying; it's debilitating. Although U.S. consumers are only paying prices 3.7% (on average) higher than the prices they were paying a year ago, these prices are more than 12% above where they were two years back. They're also nearly 20% higher than they were before the pandemic.
Between those price hikes, higher interest rates, and its slow venture into more discretionary, non-food inventory, it's not entirely surprising that Costco is bumping into a sales headwind that rival Walmart (WMT -0.08%) isn't. Walmart's U.S. same-store sales last quarter, for perspective, were up 6.4%, versus Costco's adjusted (excluding gasoline prices) figure of 3.1%.
The second implication of Costco's slowing sales growth is more troubling. It's possible Costco's well-established locations are now maxed out in terms of sales, and any meaningful sales growth from here on will have to come from establishing new stores.
Don't dismiss the idea. Costco currently operates 861 stores, 591 of which are located in the United States. The vast majority, though, have been around for over a decade. During that time Walmart upped its U.S. store count from 2012's tally of 3,868 to 5,215 now, and of those, 599 are Sam's Club warehouses. Certainly many of these stores' reaches are starting to overlap, allowing both companies to poach one another's customers.
Underscoring this possibility is the fact that Costco didn't raise its membership fee prices last month when it was widely expected to do so. It's a subtle sign that the company is getting more aggressive in its efforts to bring more regular shoppers to its stores.
Also bear in mind that during the last decade, many retailers began to realize that the U.S. retailing arena is well-saturated, if not already oversaturated. That problem hasn't simply evaporated in the meantime.
Perhaps Costco's slowing sales growth is a function of both possibilities. The problem is, only one of them will eventually come to a cyclical end...maybe. And even then, it could be a while.
Steer clear of Costco stock...at least for now
Costco will survive. Its customers love it too much for it not no. An impressive (and record-breaking) 92.7% of its membership-fee-paying customers paid for another year's worth of access last quarter. Walmart's similar Walmart+ and Sam's Club don't seem to be doing as well.
However, while Costco needs to generate organic growth to justify the stock's frothy valuation -- 36 times this year's expected earnings and 33 times next year's projected per-share profits -- there's legitimate reason to worry. The company's best and highest-growth days may be in the past. In the future, it could struggle just to find places to build new stores that won't force it to compete head-on with rivals, or even cannibalize existing Costco stores.
That's reason enough to limit Costco to your watch list rather than your portfolio...at least until it's clear that the retailer can return to its previous rates of same-store sales growth.
