This might be the perfect time to bulk up on Costco Wholesale (COST 1.01%) stock. Sure, the warehouse club retailing giant's shares don't look especially cheap following a 2023 rally. And a growth investor can find much higher profitability outside of this brutally competitive industry.
Yet Costco has consistently demonstrated a knack for earning its premium stock valuation, and for delivering plenty of cash directly to shareholders. Let's look at how the company might continue to impress investors in 2024 and beyond.
Costco is accelerating its sales growth
Wall Street likes few things more than seeing a company post accelerating sales growth. That's true for small businesses that are just building out their market positions, but it's even more impressive in the case of an established leader like Costco, which books over $200 billion in sales each year.
Costco revealed in early January that this sales footprint is expanding at a solid clip. Comparable-store sales were up 8% in December after rising 4% in the quarter that ran through late November. The chain reported higher demand across its business, in the U.S and internationally, and in its e-commerce division and physical warehouse stores. That acceleration stands in contrast with rivals like Walmart, which had a cautiously optimistic outlook for the 2023 holiday shopping season.
Costco is winning on membership
Costco's membership trends point to potentially bigger gains ahead. Consider its renewal rate, which is the single best metric investors have to judge customer loyalty. That rate edged up to a record high of 92.8% in the most recent quarter, management said in a conference call with investors.
This strong rate reflects the growing value that members are finding from their subscriptions even as inflation slows. Costco sells a high proportion of consumer essential products like groceries, but shoppers also choose to visit its stores when looking to splurge on everything from jewelry to gold bars. This mix helps ensure that the business grows through a wide range of selling conditions, including economic downturns.
Don't forget that Costco also gets most of its earnings from membership fees, making its business much more stable than your traditional retailer. Compare its recent results with Target, for example, which has lately put shareholders through huge swings in profitability as demand collapsed in a few consumer discretionary categories. In contrast, Costco's profit margin has held steady at about 3% of sales.
Risks and outlook for Costco
I see two main risks to balance against these positive factors for the stock in 2024. The first is that investors are paying too high of a price. Shares are valued at 1.2 times sales, which is close to the highest premium in the past decade. You can own Walmart, Costco's main rival, for 0.7 times annual revenue.
The second risk is that Costco might further delay its widely expected membership fee increase. It has been over six years since the last hike, and Wall Street is planning on an imminent boost to supercharge the chain's cash flow. That's especially true following the recent special dividend payment that sharply reduced Costco's cash holdings heading into 2024.
The business will be fine in either case, but a fee increase is always an invitation for members to consider canceling their subscriptions. Costco's record-high renewal rate suggests there will be no major turnover from the next fee uptick. But management's hesitance also highlights the uncertain nature of consumer spending trends right now. The surest sign that the retailer is on excellent footing for 2024 and beyond, then, will be Costco's announcement of its next annual fee increase.
