Costco Wholesale (COST +0.43%) delighted investors recently with the announcement of a $15 special dividend. Costco stock is up 62% over the past year, outperforming the S&P 500, but there may be reasons to think twice about it. Should investors stay bullish on Costco stock right now?
Buy Costco stock now
Jennifer Saibil: Costco has been a market-beating stock for years. It operates a differentiated retail warehouse model driven by membership fees. Costco marks up its products by razor-thin margins to cover associated costs and takes the fee income for the bottom line. The low costs generate strong loyalty and drive high volume and sales, and Costco's model is resilient even under pressured conditions.
In its fiscal 2024's second quarter (ended Feb. 18), Costco's sales increased again after beginning to dip into negative territory last summer. Revenue rose 5.7% year over year, with comparable sales growth accelerating to 5.6%. E-commerce was a strong driver, up 18.4% over last year.
But the real story is in the membership. Costco is still experiencing some pressure from consumers waiting on large-ticket items and switching to cheaper alternatives, but traffic was up 5.3%. Membership grew 7.8% from last year, and membership fee was up 8.2%. Cardholders increased 7.3%, and renewal rates were 90.5% worldwide and 92.9% for the U.S. and Canada. This leads to stronger profitability as well, and earnings per share were up from $3.30 last year to $3.92 this year.
Costco has plenty of expansion opportunities within the U.S. and even more so globally. It operates 603 U.S. warehouses but still doesn't have even one store in Rhode Island, West Virginia, or Wyoming. Internationally, it has 272 locations, including five in China, where it only entered last year and where it has incredible growth opportunities. It's accelerating its expansion plan, and it expects to open 33 new locations this year after opening 23 last year. That's still a small amount compared with similar retailers, and it leaves Costco with a long growth runway.
If inflation is indeed moderating and interest rates start to come down, Costco should perform even better the rest of the year.
Its an expensive stock
Demitri Kalogeropoulos: Costco's latest quarterly results demonstrate why many on Wall Street love this warehouse retailing business. Comparable-store sales were up 6% after adjusting for swings in gas prices, executives said in early March, which beat peers like Walmart.
Yet, the chain barely generated any profit from this growth. Operating income landed at roughly the same $4 billion that investors saw a year ago, translating into a 3% margin. Walmart, in contrast, is boosting its profitability thanks to growth in areas like its booming digital ad business.
Costco shares are also priced at a huge premium that raises the risk you'll overpay for this business. Investors are forking over 1.3 times annual sales for the stock, or about twice Walmart's valuation. Beyond the better profit margin, you get a higher dividend yield by owning Walmart stock at about 0.7 times annual sales.
Sure, a Costco investment brings its own benefits including steady annual earnings that are powered by membership fees. These fees are highly predictable given that more than 90% of its customers choose to renew each year.
Plus, Costco likes to shower investors with special, one-time dividend payments from time to time. Those payments are impossible to predict, though, and so income investors might prefer a company like Walmart for its more generous commitment to pay out a large portion of profits each year as direct cash returns.
It's not that Costco is a bad business or a weak stock, of course. But given its huge share price rally in the past year (up over 50%), expectations could hardly be higher. That scenario makes it more likely you'll see disappointing returns if the retailer doesn't continue trouncing its peers on the growth front.
Costco's a great long-term stock
Will Costco stock take a break from its decades-old streak of beating the market this year? Only time will tell. Long-term investors may want to buy in any case, with the likelihood of Costco stock maintaining its market-beating status over many years. Other investors might want to take a wait-and-see approach to how Costco stock will perform this year.
