When it comes to retailing, few companies surpass the performance of Costco (COST 1.01%). The warehouse club has built a loyal customer base with a footprint that spans 47 U.S. states and 14 countries.
It has tremendous room for domestic and international growth, and the company has sidestepped the cultural pitfalls that hampered the international expansions of Walmart and Home Depot.
Despite that opportunity, investing in the retail stock profitably may be more of a challenge. Knowing that, investors need to consider these factors before opening a position.
1. Costco's slowing growth
On the surface, Costco still appears prosperous. It has grown to 874 locations as of the beginning of February, 602 of which are in the U.S. This only gives it minimal coverage in its 13 other countries. In the U.S., many mid-size metros lack a Warehouse Club, and many major metros lack a Business Center, a type of Costco store designed to serve enterprises. Thus, it has plenty of opportunity for expansion.
Nonetheless, comparable sales growth in January came to less than 3% compared with year-ago levels. And even when considering the first 22 weeks of fiscal 2024 (ended Feb. 4), that growth rate is under 5%. In January 2020, just before lockdowns began, Costco reported almost 7% for January and over 6% for the prior 22-week period (ended Feb. 2, 2020). Such results do not undermine Costco as a business, but they could dissuade investors from buying the stock.
2. The stock price and valuation
Admittedly, that slowing growth has not deterred investors so far. Over the last year, Costco stock is up more than 40%.
Those increases did not put off Costco bulls like the late Charlie Munger, who held the stock until his passing in November 2023. However, his longtime partner, Warren Buffett, approved the sale of Berkshire Hathaway's entire position in late 2020. The decisions came after Berkshire had held it for more than 20 years.
The rising valuation may have prompted that move. Today, the price-to-earnings (P/E) ratio has reached 49. When considering that earnings multiple with the slowing growth, it may now be more challenging to profit from this stock.
3. The company's dividend
Another issue with Costco stock that may only have limited appeal is its dividend. The annual payout has risen to $4.08 per share and grew to that level amid 19 years of consecutive increases. Nonetheless, this translates to a dividend yield of less than 0.6%, less than half of the S&P 500 average of 1.4%.
Costco shareholders occasionally benefit from special dividends. In January, shareholders received a $15.00 per share special dividend, the company's first extra payout since 2020.
Unfortunately, that only brings the yield for 2024 up to 2.6%, well under the 2.9% yield Target shareholders receive yearly. This makes Costco shares an unlikely draw for income investors, and even Costco bulls are unlikely to buy the stock for this reason.
Do not buy any more Costco stock
Although Costco will probably continue to prosper as a retailer, investors should probably not add shares. Indeed, with Costco's continuing growth, some longtime shareholders may choose to hold their positions.
Still, the combination of slowing comparable sales growth and rising share prices is unlikely to serve new investors well. Even when considering the special dividend, Costco's payout is unlikely to motivate investors to buy the stock.
Ultimately, Costco's store additions and loyal customer base will probably continue to boost sales. But if they're looking to invest in retail stocks, prospective investors will likely earn higher returns elsewhere.
