Costco Wholesale (COST -0.39%) is a popular stock on Wall Street for good reasons. The warehouse club retailing giant has outperformed the market by consistently gaining share in a highly competitive industry. Costco's growth rate rarely disappoints, and its earnings are much more stable than its peers thanks to a steady stream of subscription fee income.
Those competitive assets have been enough to allow the stock to roughly triple the wider market's gains over the last several years. Costco's stock price has nearly doubled in the past three years, in fact, while the S&P 500 is up 25% in that time.
But can the company sustain that momentum going forward? Let's take a closer look.
Costco's business will grow
Costco's surest path to positive shareholder returns is to boost sales at a faster clip than its peers. It's been doing a great job on this score lately, with same-store sales rising 6% in the most recent quarter, compared to Walmart's 4% uptick.
Both retailers lean on their price-leadership selling approach to boost customer traffic. However, Costco has some additional advantages over its larger rival that should support higher investor returns. Its mix of consumer essentials and luxury discretionary items allows it to cater to a wide range of shoppers, for one.
Costco has shown that it can be nimble, too. Its recent offering of precious metals like gold and silver helped the e-commerce niche expand at a blazing 18% rate last quarter. Look for Costco to press those advantages over the next few years, ideally keeping same-store sales gains near the top of its industry.
Membership metrics
One underappreciated fact driving stock returns is that Costco is a membership club first and a retailer second. Most of its earnings come from subscriber fees that aren't nearly as volatile as the profits that come from merchandise sales.
That's why it matters where Costco's membership metrics shift over the next several years. Costco recently achieved a record 93% renewal rate, meaning that essentially all its subscribers are getting plenty of value from their memberships. If the company can maintain that high level of renewals over the next few years, the stock will likely keep beating the market. That's especially true given the fact that Costco will almost certainly hike its annual fees in 2024 or 2025. Higher fees, combined with a rising membership base, bode well for the retailer's earnings power.
Watch Costco's stock for now
The stock's returns still might disappoint investors even if Costco makes progress on these key growth and profit initiatives. After all, shares are currently valued near an all-time high of 1.3 times annual sales. You can own Walmart and Target for roughly half that premium.
As a result, investors might want to watch Costco stock for the time being in hopes that a market downturn produces a more compelling price for its shares. Sure, you'll have a hard time finding a retailer that offers a better mix of growth, stability, and earnings. But Costco's elevated stock price limits the returns you might get from owning this stellar business over the next few years.
Consider retailing peers that aren't priced at such a high premium, like Target, and keep an eye on Costco stock for the next opportunity to pick up shares at a discount.
