Can Costco Sustain its Over 200% Growth Spurt in the Last 5 Years and Maintain Pace in 2025?
Can Costco Sustain its Over 200% Growth Spurt in the Last 5 Years and Maintain Pace in 2025?
Costco (COST increasing by 0.74%) is among the top-performing large-cap retail stocks in the past five years, consistently demonstrating its strength as a leading retailer. This was evident once again as it reported impressive results for its fiscal first quarter. With an increase of more than 50% for the year and approximately 235% over the past five years, the stock continues to soar, as of my current record.
Let's delve into Costco's recent performance to determine if this positive trend will persist.
Another outstanding quarter
This quarter's report marks the first since Costco implemented a membership fee hike, which kicked in September. This was the retailer's first membership fee increase in seven years. The fee for regular members was bumped from $60 to $65 annually, and the Executive Membership fee increased from $120 to $130 annually. About half of Costco's members belong to its higher-tier membership, which offers a 2% rebate on most purchases, along with other perks.
Revenue from membership fees rose 8% during the quarter to reach $1.17 billion. Costco noted that the impact of the membership fee increase was minimal, accounting for less than 1% of the quarter's fee growth. Instead, the membership fee revenue boost was primarily driven by an increase in members, which rose by nearly 8% to an impressive 77.4 million paying households.
The membership renewal rate was 92.8% in North America and 90.4% worldwide. This marked a slight decrease due to the rising number of digital subscriptions, which have slightly lower renewal rates.
Same-store sales increased by 7.1%, taking into account fluctuations in gasoline prices and foreign exchange. U.S. same-store sales climbed by 7.2% (adjusted), while Canadian comparable-store sales rose by 6.7% (adjusted). Other international same-store sales also rose by 7.1% (adjusted). E-commerce revenue grew by 13.2% on an adjusted basis.
The robust same-store sales growth can be attributed to a surge in customer visits, which increased by 5.1% worldwide and 4.9% in the U.S. Excluding gasoline and currency, average transactions were up by 2% worldwide and 2.3% in the U.S.
Costco highlighted fresh food as a primary driver, with comparable sales increasing by high single digits. Meat, in particular, performed exceptionally well, boasting double-digit growth, as Costco observed customer strength across both the upscale and budget-friendly segments within this category. Moreover, the popularity of its Kirkland's Signature brands continues to outpace its overall performance, while it has managed to reduce prices on certain items.
Non-food categories also saw impressive growth, Increasing by high single digits. Various categories, including jewelry, home furnishings, and luggage, among others, enjoyed double-digit boosts.
Costco also continued to expand its warehouse store network. The quarter ended with 897 locations, up from 871 stores last year. Seven new clubs were opened in the quarter, and the company anticipates opening 29 new locations for the year, including three relocations.
This growth resulted in an 7.5% revenue increase to $62.15 billion for the company, accompanied by a 13% jump in adjusted earnings per share (EPS) to $4.04. Both figures surpassed analyst expectations, which called for EPS of $3.78 on revenue of $62.08 billion.
Can Costco's success continue?
One of the criticisms often leveled at Costco is its valuation. The stock currently trades at a more than 55 times forward price-to-earnings (P/E) ratio. However, the subject of Costco's valuation has emerged as a recurring theme over the past few years, yet the stock's impressive performance has persisted.
Additionally, with the membership fee increase, Costco's earnings growth should begin to accelerate. The retailer leverages a 100% gross margin from its membership fees, meaning the incremental revenue gain from the fee increase will directly contribute to its operating income.
Given its 77.4 million paying members and the average increase in membership fees, that translates to $580.5 million in additional operating income, or roughly $435 million in net income (assuming a 25% tax rate). This would represent a significant boost to its annual dividend, as its approximately 443 million shares would benefit from a $1 increase.
Furthermore, the company's reputation for offering low prices and convenience continues to resonate with customers, particularly in the current high-inflation environment. As a result, I believe the stock will simply continue to thrive, delivering solid returns to investors over the long term.
Investors interested in the retail sector might consider diversifying their portfolios by investing in Costco, given its strong performance. With the implementation of a membership fee hike, Costco's earnings growth is projected to accelerate.
Given that Costco generates a 100% gross margin from membership fees, the incremental revenue gained from the fee increase will directly contribute to its operating income. This could lead to a significant boost in its annual dividend, benefiting its shareholders.