Costco (COST 1.01%) has been a positive force in shareholders' portfolios over the past several years. The warehouse retailer thrived through every phase of the pandemic and its aftermath, first handling record customer traffic when shoppers were bulking up on essentials and then posting fantastic sales gains as incomes soared. Costco endured a smaller growth hangover than its peers during the post-restrictions period, too.
These wins underscore Costco's valuable competitive assets, like its price leadership, strong brand, and excellent customer loyalty. Let's look at where these factors could steer the stock over the next several years.
Membership metrics
Costco is a retailer, and that means investors will want to follow comparable-store sales for signs that the business is on the right track. There's no cause for concern here. Sure, comps decelerated in fiscal 2023. But the slowdown was modest (gains fell to 3% from 5%) and there's already a rebound in the works. Comps were up 5% in the 22 weeks that ended in early February, management recently announced.
Costco's long-term returns are correlated to its membership metrics because the chain gets most of its earnings from subscription fees. Importantly, its renewal rate continues to climb higher into record territory.
A full 93% of members in the core U.S. market renewed their subscription this past year, in fact. This figure confirms that Costco is providing tons of value for its members, and that its earnings are highly likely to continue their steady climb. Costco booked $8.1 billion of operating profit in fiscal 2023 compared to $4.7 billion in 2019.
Drawbacks to the stock
There are a few factors that might pressure the stock over the next several years, though. Wall Street is excited about an upcoming membership fee increase but could be disappointed to see this hike translate into just a modest earnings boost.
Costco is due for a raise here given more than five years have passed since the last time it raised fees. But management tends to direct roughly all the extra cash from these boosts toward lowering prices rather than hiking profitability.
COST Operating Margin (TTM) data by YCharts
On the plus side, this approach means shareholders don't have to endure the type of annual earnings swings that are common with retailers like Target. The downside is that Costco's profit margin tends to remain low, at about 3% of sales, even during boom times.
Investors also might be disappointed with the chain's cash returns in the coming years. Costco doesn't commit to a generous annual dividend payment like Walmart does, but instead returns most of its earnings in unpredictable, sporadic payments.
Price and value
Costco appears established as a favorite and frequent shopping destination for its growing pool of members. As a result, it is highly likely to be setting new sales and earnings records in a few years, regardless of the consumer spending environment.
The big question is whether that success will translate into market-beating returns for patient investors. Shares are expensive, unfortunately. Costco stock is valued at 1.3 times annual sales, which is its highest premium in the past decade.
You can own Target for 0.6 times sales or Walmart for 0.7 times revenue. Even Amazon seems like a relative value at 3 times sales, given its rising profitability and many avenues for growth.
Costco stock should still perform well compared to retailing peers thanks to its industry-leading growth and stable cash flows. But investors should temper their expectations for its short-term returns given the stock's expensive valuation today.
