Is Costco stock a no-brainer buy?

costco (expense -0.14%) The past few years have provided a positive boost to our shareholder portfolio. The warehouse retailer has thrived through every stage of the pandemic and its aftermath. First we handled record customer traffic as shoppers bought essential items in bulk, and then we recorded fantastic sales profits as our revenue soared. Even in the post-regulation period, Costco experienced fewer growth aftereffects than its competitors.

These wins highlight Costco’s valuable competitive assets: price leadership, strong brands, and outstanding customer loyalty. Let’s take a look at where these factors could lead the stock over the next few years.

Membership Metrics

Costco is a retailer. This means investors want to follow comparable store sales for signs that the business is heading in the right direction. There is no cause for concern here. Of course, comps slowed in fiscal 2023. But the slowdown has been mild (gains fell from 5% to 3%) and a rebound is already underway. Comps rose 5% in the 22 weeks ended in early February, management recently announced.

Costco’s long-term profits are correlated with membership metrics because the chain earns most of its revenue from subscription fees. Importantly, renewal rates continue to climb into record territory.

In fact, 93% of members in our core US markets renewed their subscription last year. These numbers confirm that Costco is providing tremendous value to its members, and that its profits are likely to continue to grow. Costco reported operating profit of $8.1 billion in fiscal 2023, compared to $4.7 billion in 2019.

Disadvantages of stocks

However, there are several factors that could put pressure on the stock in the coming years. Wall Street is excited about the upcoming dues increase, but may be disappointed to see that this increase translates into only a modest revenue increase.

It’s been more than five years since Costco last raised its fees, so they’re looking to increase it here. However, management tends to use the extra cash from this stimulus to lower prices rather than increase profitability.

COST operating margin (TTM) data from YCharts

On the positive side, this approach means shareholders don’t have to endure the types of annual earnings fluctuations that are common at retailers such as: target. The downside is that Costco’s profit margins tend to be low, around 3% of sales, even during good times.

Investors may also be disappointed with the chain’s cash returns in the coming years. Costco is not committed to paying generous annual dividends: walmart But instead, you return most of your income in unpredictable, sporadic payments.

price and value

Costco appears to have become one of the most preferred and frequented shopping destinations due to its growing membership. Accordingly, regardless of the consumer spending environment, new sales and profit records are likely to be broken within a few years.

The big question is whether that success will translate into market-beating returns for patient investors. Unfortunately, stocks are expensive. Costco stock is valued at 1.3 times annual sales, the highest premium in over a decade.

You can own Target at 0.6 times sales or Walmart at 0.7 times sales. even Amazon Considering it’s becoming more profitable and has multiple avenues for growth, 3x sales seems like a relative value.

Costco stock is expected to continue to perform well compared to retailers based on industry-leading growth and stable cash flow. However, investors should temper their expectations for near-term returns given the high valuations of stocks today.