One of the most resilient businesses over the past couple of years has been Costco Wholesale (COST 1.01%). It has done well amid inflation and the pandemic, often remaining a go-to option for consumers to stockpile necessities.
But there are a few trends that investors should be monitoring closely these days, as Costco's business may finally be showing signs of slowing down. The two charts below suggest that its growth rate is facing some challenges right now. And if that's the case, is now the time to sell the stock?
Monthly sales growth is consistently below 5%
Costco investors don't need to wait every quarter to gauge how the business is doing. That's because the retail giant reports on its comparable sales every month. And that can provide investors with an insight into retail trends and whether demand remains strong. Comparable sales growth tells investors how much more revenue stores that were open this time last year are generating now. It excludes the impact of new store openings and the closure of locations.
In recent months, Costco's same-store growth rate hasn't been all that high.
Image source: Company filings.
Costco's monthly sales numbers haven't been great this year, and for nine straight months, they've been below 5%. And while it did look like they were improving in the summer, in October, they dipped back down to just 3%. The reason this is a problem is that Costco is a stock that trades at 41 times its earnings. At that kind of a multiple, investors expect a high rate of growth. And if these numbers don't improve quickly, the stock could be due for a decline.
U.S. sales growth is even worse
The more concerning numbers for growth investors are Costco's domestic sales. If the company isn't generating strong growth in the U.S., it's going to be difficult for Costco to pick up the slack elsewhere. And it's no coincidence that U.S. monthly sales numbers have also been underwhelming.
Image source: Company filings.
In six of the past eight months, the company's same-store monthly growth rate in the U.S. hasn't even reached 2%. That's a potential problem heading into the busy holiday season. In November and December of last year, Costco's monthly comparable sales were strong in the U.S. at over 6%. If there isn't a strong resurgence this year, this could be a stock that faces some significant downward pressure in 2024.
Should you avoid Costco's stock?
Costco is a top retail brand that enjoys a high membership renewal rate of more than 90%, suggesting that its members are highly satisfied with the company's products and services. Economic conditions are likely to have more to do with the company's slowing growth rate than anything else, which is why if you're a long-term investor who is willing to hang on to the stock for years, Costco can still be an excellent buy.
I wouldn't be surprised if it were to struggle in 2024 if its growth rate doesn't improve. But in the long run, given its strong, growing customer base, Costco's business looks poised for more growth in the years ahead, which is why it can still be worth adding to your portfolio today -- but be prepared for a potentially bumpy ride next year.
