Costco (COST 0.65%) has long been a consistent winner on the stock market. The retailer has one of the most resilient business models in its industry, and the brand has long had a loyal customer base, made up of people who love the retailer's quality goods at low prices, the treasure-hunt nature of the shopping experience, and bargain prices on products like rotisserie chickens.
As a business, Costco has found success with its membership model, as membership fees drive most of the company's profit. It's also been able to expand its store base at a time when many retailers are relying on e-commerce for growth, and Costco has also successfully incorporated e-commerce into its business model.
Shares of the warehouse retailer are expensive, trading at a price-to-earnings ratio of 52, but that shows that it's earned a premium from investors.
But where will the stock be in three years? Let's take a closer look at Costco's plans for growth.
Image source: Costco.
Where Costco is headed
Despite weakening consumer sentiment and inflation, Costco is still delivering solid comparable-sales growth. In the fiscal second quarter, which ended in February, comparable sales excluding fuel prices and currency exchange rose 9.1%, showing strong demand for the company's products. E-commerce sales were also up 22.2%, a sign of ample demand for shopping online at Costco.
The strong comparable-sales results should also support the company's store growth. Costco finished the second quarter with 897 warehouses, and added 29 stores last year, growing its store base by roughly 3%.
Extrapolating that figure over the next three years, Costco would add about 93 warehouses, bringing its grand total to 990 and increasing its overall store base by 10%.
Assuming the company grows its comparable sales between 5% and 10% annually over the next three years, total comparable sales would grow between 16% and 33% during that period. Combining that with the impact of the store base increases, Costco's net sales would increase between 26% and 43% over the next three years, meaning it would reach between $326.5 billion and $370.5 billion.
However, that's not the only ingredient in Costco's business model. Membership fees also make a modest but important contribution to revenue.
In fiscal 2024, the company brought in $4.8 billion in membership fees, and it recently raised its base membership fee to $65, which will flow through in the current fiscal year. Paid members have also grown by 7% annually over the last two years, meaning membership is on track to grow a total of 23% over the next three years if it maintains that rate.
With the boost in the membership fee, total membership revenue will increase about 32% to $6.33 billion. That's key because most of that money flows straight to the bottom line.
What the bottom line will look like
Costco typically holds its gross margin low in order to encourage memberships and spending in its stores, but sales-based operating income should grow by about 35% based on this net sales forecast. That would bring it to $6 billion, or $12.3 billion in operating income with the $6.3 billion in membership fees, up 33% from fiscal 2024.
If its net interest income and tax rates remain similar, that means earnings per share should grow by the same percentage, as its share count has not changed significantly in the last three years.
At the current valuation, investors seem to be pricing in more growth than that, but Costco's low-risk, recession-proof status could ensure that it retains a premium valuation. Additionally, the company has a history of paying special dividends, last paying a special dividend of $15 per share in December 2023. It will likely be at least a few years until it pays another special dividend.
Overall, Costco the business looks well-positioned for steady growth over the next few years, and should be resilient in the face of tariffs and other economic noise.
Still, the stock's valuation limits the upside to the stock. While Costco remains a solid long-term investment, investors should temper their expectations over the next few years.
