Costco Wholesale (COST 0.32%) is doing well in a tough selling environment. That was the headline takeaway from the retailer's March earnings update, which showed solid sales growth through mid-February.
The giant warehouse retailer continues to win market share thanks to its low product prices. Yet its members aren't simply buying consumer essentials anymore; they're also increasingly splurging on discretionary products like jewelry, gold, and appliances.
Let's take a look at the most encouraging news from this latest earnings report, and whether it means the stock is still an attractive buy right now.
NASDAQ: COST
Key Data Points
1. Traffic and market share
If it has seemed to you that Costco's aisles are packed lately, you're right. Customer traffic was up 5% this past quarter, in fact. Combined with a 1% uptick in average spending, this boost translated into 6% higher comparable-store sales for the period.
Rival Walmart (WMT +0.37%), by contrast, posted a 4% traffic increase in the most recent quarter (and 4% higher comps). While both retailers are growing quickly, Costco stands out even among industry leaders.
Management credited its aggressive pricing strategy for helping keep shoppers engaged. "We always want to be the first out there trying to lower prices," CFO Richard Galanti said in a conference call with investors.
2. E-commerce rebound
One of the fastest growth niches these days is Costco's e-commerce division, which expanded at an 18% rate in the recent period. That's a big acceleration from the prior quarter's 6% boost and suggests shoppers are increasingly tilting spending back toward discretionary purchases rather than focusing only on essentials like groceries.
Costco saw huge demand for its new gold bar products, and online shoppers were also busy buying appliances into early 2024. There's a long runway for growth ahead in the e-commerce niche beyond simply introducing more popular products (like silver most recently). Costco is also busy adding partnerships with massive consumer brands even as it markets its own services, ranging from automotive to vacation packages.
3. Record renewal rates
Costco's renewal rate is one of the single best metrics that investors can follow for an indication of its business strength, because it reflects the value that shoppers are getting from their annual subscriptions. There's nothing for shareholders to worry about in this area; Costco's renewal rate ticked up to a new record of 92.9% in the core U.S. market.
Part of that success can be attributed to the fact that the chain hasn't raised its annual prices in over six years. It is overdue in that hike, which tends to happen about every five years or so. Investors shouldn't expect the next fee increase to instantly boost Costco's earnings power, since the company tends to direct almost all of its excess cash into keeping prices low. But over time, this strategy yields higher customer traffic, rising membership levels, and increased market share.
The biggest risk for investors, then, is in paying too high of a price for this well-performing business. That's an appropriate concern given that Costco stock is valued at 1.3 times sales today, or about twice the premium attached to Walmart or Target shares.
Yet the chain is earning that premium by generating faster sales growth. Continued success here could easily translate into more market-beating returns for patient investors, even from today's somewhat elevated share price.
