Costco’s Incredible Sales Momentum Continued in July
Beginning last summer, Costco Wholesale (NASDAQ:COST) posted a series of humongous sales gains. Unsurprisingly, some skeptics wondered whether this sales surge was just a blip caused by the COVID-19 pandemic.
In recent months, Costco has proved the doubters wrong by continuing to post strong sales growth while going up against increasingly difficult year-over-year comparisons. The warehouse club giant did so yet again when it reported its July sales results last week.
Another excellent month
For the four-week period ending on Aug. 1, Costco’s adjusted comp sales (excluding the impact of gasoline price inflation and currency fluctuations) rose 8% year over year. The company reported solid comp sales growth in all regions of the world, ranging from 8.5% in the U.S. to 5.5% in Canada.
Comparable e-commerce sales grew just 5.7% last month, compared to a 76.1% jump a year earlier. Instead, brick-and-mortar sales powered the bulk of Costco’s growth. Indeed, consumers continue to flock to Costco’s warehouses, even with COVID-19 case numbers rocketing higher in the U.S. (the company’s top market by far). Comparable traffic increased 6.9% globally and 5.8% in the U.S. during July.
Costco’s high-single-digit comp sales growth was particularly impressive because the retailer faced an extremely tough year-over-year comparison. Adjusted comp sales surged 15.8% in the prior-year period.
Including the benefit from soaring gasoline prices and the weakening dollar, Costco’s comparable sales grew 13.8% last month. And total sales rose 16.6% to $15.2 billion.
Non-food and ancillary categories continue to lead
During the peak of the pandemic, sales of food and related items surged at Costco as consumers chose to cook at home more often. As a result, comp sales growth in those categories has lagged the company average in recent months (while remaining positive).
However, Costco continues to post double-digit growth in sales of non-food merchandise. Home furnishings, sporting goods, jewelry, and hardware all performed especially well last month.
Meanwhile, sales continue to rocket higher in Costco’s ancillary business lines. Ancillary comp sales jumped more than 40% year over year in July. Costco is selling even more gasoline than it did before the pandemic. It’s also seeing strong recoveries at its food courts and optical departments.
Costco stock keeps hitting new highs
After briefly plunging below $320 earlier this year, Costco stock has rallied more than 40%, recently reaching a new all-time high above $440. The stock has more than doubled since the beginning of 2019.
Costco certainly deserves the love it is getting from investors. Adjusted comp sales growth topped out around 17% last fall. Given that Costco just reported an 8% comp sales gain for July on top of a 15.8% increase a year earlier, the retail giant seems poised to continue posting solid sales growth for the foreseeable future.
That said, Costco stock now trades for a hefty 38 times forward earnings. Considering the company’s deep moat and massive expansion potential, Costco is still a solid stock for long-term investors. However, in light of the stock’s lofty valuation today, shareholders should expect slower share-price appreciation going forward.
Investors in Costco Wholesale (NASDAQ:COST) have made a stellar return of 198% over the past five years
When you buy shares in a company, it’s worth keeping in mind the possibility that it could fail, and you could lose your money. But when you pick a company that is really flourishing, you can make more than 100%. One great example is Costco Wholesale Corporation (NASDAQ:COST) which saw its share price drive 165% higher over five years. It’s also good to see the share price up 16% over the last quarter.
Now it’s worth having a look at the company’s fundamentals too, because that will help us determine if the long term shareholder return has matched the performance of the underlying business.
To paraphrase Benjamin Graham: Over the short term the market is a voting machine, but over the long term it’s a weighing machine. One way to examine how market sentiment has changed over time is to look at the interaction between a company’s share price and its earnings per share (EPS).
Over half a decade, Costco Wholesale managed to grow its earnings per share at 15% a year. This EPS growth is lower than the 22% average annual increase in the share price. This suggests that market participants hold the company in higher regard, these days. That’s not necessarily surprising considering the five-year track record of earnings growth.
The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).
NasdaqGS:COST Earnings Per Share Growth August 13th 2021
We know that Costco Wholesale has improved its bottom line lately, but is it going to grow revenue? If you’re interested, you could check this free report showing consensus revenue forecasts.
What About Dividends?
When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return. The TSR incorporates the value of any spin-offs or discounted capital raisings, along with any dividends, based on the assumption that the dividends are reinvested. So for companies that pay a generous dividend, the TSR is often a lot higher than the share price return. As it happens, Costco Wholesale’s TSR for the last 5 years was 198%, which exceeds the share price return mentioned earlier. The dividends paid by the company have thusly boosted the total shareholder return.
A Different Perspective
Costco Wholesale shareholders have received returns of 37% over twelve months (even including dividends), which isn’t far from the general market return. That gain looks pretty satisfying, and it is even better than the five-year TSR of 24% per year. It is possible that management foresight will bring growth well into the future, even if the share price slows down. It’s always interesting to track share price performance over the longer term. But to understand Costco Wholesale better, we need to consider many other factors. Even so, be aware that Costco Wholesale is showing 2 warning signs in our investment analysis , you should know about…
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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Could This Be the Perfect Time for Costco to Raise Membership Prices?
Since the pandemic’s start, Costco (NASDAQ:COST) has experienced an increase in new customers and spending. The company was deemed an essential retailer and allowed to stay open while many other businesses had to shut down.
Moreover, the nature of the business as a big-box retailer was ready-made for how consumers changed their behavior during the pandemic, making fewer trips to the store and buying more on each trip. Still, Costco is not like other stores; you need to pay an annual membership fee for the privilege of shopping at a Costco warehouse.
Given that its customer value proposition has never been higher, this could be the opportune time for Costco to raise those membership fees.
Costco is due for a membership price hike
At the end of its fiscal third quarter, Costco boasted 60.6 million paying households, up by 900,000 from the previous quarter. Of that total, 24.6 million were executive members, who pay twice the annual fee and qualify for a reward of 2% cashback on their annual spending. Membership fees are $60 for the standard and $120 for the executive.
Overall, Costco earned $901 million in membership fees in the most recent quarter, and since there are little expenses to go with membership premiums, nearly all of those fees flow to the bottom line. Historically, Costco has raised membership fees roughly every five years. The last time it raised fees was in 2017. It did so by $5 for regular and $10 for the executive.
A similar increase to its current membership base could lead to an increase of $1.7 billion in annualized membership fees and subsequently to the bottom line. The five-year interval is approaching, and it could be a good time for Costco to raise fees now. It recently announced permanent wage increases for its employees, which it can point to as a reason for raising fees. And its value to customers has arguably never been higher.
What this could mean for investors
Boosted by the pandemic, Costco reported a record operating profit of $5.4 billion in 2020. If it implements the aforementioned price increases, it could add 31% of that to operating profits annually. That is, of course, assuming members don’t balk at the increase and cancel their memberships.
That’s what makes this a great time for Costco to put in the increase. Doing it now with the confluence of factors in its favor could mean a much lower member churn from the increase. If it waits too long, it could miss the opportunity, and it could risk losing more members than it otherwise would have.
The stock price is up 13.8% year to date, and that has pushed up Costco to trade at a forward price-to-earnings ratio of 37.5, near the highest level in the last decade. The pending price increase could already be priced into the stock trading at expensive valuations. Investors should keep an eye out for any news regarding membership fee increases and evaluate the stock after the announcement.