Frisco

We are increasing our price target for Costco after another stable quarter confirms our thesis

Bronwen Cerys September 30, 2024

Costco reported lackluster quarterly results on Thursday, with a small decline in sales more than offset by strong profitability and a rise in profits. The report didn’t blow us away, but it still gave us plenty of reminders of why Costco investors should stick around. Total revenue in the fourth quarter of fiscal 2024 was $79.7 billion, falling short of analysts’ expectations of $79.97 billion, according to LSEG estimates. Sales rose 1% year-over-year, although the year-ago quarter had an extra week, skewing the comparison. Earnings per share were $5.29 for the 16-week period, beating analyst forecasts of $5.08, LSEG data showed. The earnings result includes a one-time tax benefit of 14 cents per share. But even after removal, the final results were still better than expected. Costco Wholesale Why we own it: Costco is the best-run retailer in the world, with a business model focused on offering its members a relatively small range of products at unbeatable prices. Costco was successful for decades, but high inflation in recent years has really allowed the company’s value-driven ethos to shine. Competitors: BJ’s Wholesale, Walmart and the other club that holds Amazon. Last Purchase: June 15, 2020. Start Date: January 27, 2020. Shares of Costco fell about 1.4% to about $889 each in extended trading on Thursday, adding to modest losses over the regular period Meeting. The stock – one of our top performers this year, up nearly 37% – closed at a record high of $917.08 per share on Monday. Bottom line: Costco’s fourth-quarter results aren’t cause for concern, even though sales fell short of expectations. The miss was marginal and was more than offset by solid year-over-year growth in gross margin and operating margin, which enabled the profit increase. Taking into account the extra week in last year’s fourth quarter and eliminating the aforementioned tax benefit, adjusted earnings per share increased 12.6% on an annual basis. Membership dues revenue of $1.5 billion was a bit low, but keep in mind that the most recent dues increase – announced in July and implemented on September 1 – is not reflected in Thursday’s results. To be sure, the impact on Costco’s current 2025 fiscal year will be “minimal” to begin with, as CFO Gary Millerchip noted in the conference call. “The majority of the benefit will occur in the second half of fiscal 2025 and fiscal 2026.” We left the earnings release with growing conviction that Costco remains a top destination for those seeking the best bang for their buck – and who isn’t these days? Costco remains true to its mission and finds new ways to reduce its own costs. The company then passes these cost savings on to its members and tries to reduce prices where possible and otherwise keep them stable. If Costco’s suppliers are expected to try to lower prices when they can, then “we’ll start by leading by example and showing the benefits of investing in price and increasing volume.” So that’s what we’re doing,” said CEO Ron Vachris . “But we are also seeing great support from our suppliers and partners around the world who are also interested in growing their business and using Costco as a partner to achieve this.” Member demographics were a bright spot on the call. About half of the new members in the 2024 fiscal year will be under 40 years old, said CFO Millerchip. “This percentage has increased since Covid-19 and has reduced the average age of our members in recent years.” The younger Costco can attract a new member, the greater the chances of maintaining that member’s loyalty over time. COST YTD Mountain Costco’s year-to-date stock performance. Costco shares aren’t cheap – a fact that recently led to a downgrade from analysts – but we continue to see further upside potential. The reason is simple: Consumers will continue to flock to Costco in search of value, and investors, in turn, will continue to reward management’s ability to foster customer loyalty with a premium price-to-earnings ratio. In addition, the benefits from the slightly higher membership fees have not yet been incorporated into the company. All in all, we are increasing our price target on the stock from $875 to $950 per share. We’re keeping our rating of 2 on the stock for now, meaning we’ll wait for any dips before buying more shares. Quarterly Comment Costco’s fourth-quarter gross margins of 11% beat Wall Street’s estimate of 10.94%, increasing 39 basis points on a reported basis and 33 basis points excluding gas inflation. Both numbers are worth highlighting, but the Ex-Gas numbers provide better insight into Costco’s underlying fundamentals since oil prices are outside of management’s control. One basis point is equal to 0.01%. Core products reportedly weighed five basis points on Costco’s gross margins, while the 2% rewards program for certain members represented a four basis point headwind. However, this was more than offset by a 44 basis point improvement in Costco’s ancillary stores and other businesses – including gas stations, pharmacies, food courts, travel and hearing aid centers. Finally, last in, first out (LIFO) inventory accounting provided a five basis point tailwind. Adjusted same-store sales growth of 6.9% beat expectations as an increase in traffic was only partially offset by a modest decline in average ticket price. The supply chain was a topic of conversation on the call, with management noting that the Red Sea remains a trouble spot (remember that shipping containers in that area have faced attacks from Yemen’s Houthi rebels). While any further disruption could increase ocean freight rates across the board, staff have done a very good job of protecting the company from recent price increases “with good, solid contracts for this year.” Additionally, executives said spot prices – what they would pay if they signed contracts now – appear to have peaked and are starting to fall again. According to management, current inflation dynamics are similar to last quarter. A slight increase in food and non-food prices was offset by a decrease in non-food prices, resulting in overall inflation of around zero. Thursday marked Costco’s first conference call since its long-awaited membership fee increase became a reality. While it is still too early to assess the impact, we continue to expect little resistance from members due to the incredible value Costco provides. This is particularly true for the Kirkland Signature brand, which is still growing faster than the company as a whole. Millerchip listed many examples of Kirkland Signature products that saw price reductions in the quarter, such as macadamia nuts, a three-liter bottle of Spanish olive oil and double-pack baguettes. Additionally, the finance chief said Costco’s “commitment to sustainability” has led to some product packaging redesigns that use less plastic, giving the team the opportunity to lower prices. Laundry packages are an example of this, Millerchip said, increasing from $19.99 to $18.99. In other words, not only are we seeing disinflation at Costco, where the rate of price increase is slowing, but we are actually seeing multiple examples of deflation, meaning prices are actually falling. During the quarter, Costco’s membership renewal rate was 92.9% in the U.S. and Canada, a tick lower than the 93% rate observed in the fiscal third quarter, while it remained steady at 90.5% globally. Millerchip attributed the slight decline in renewals in the US and Canada to online membership advertising, which ran for a short period in 2023 and resulted in 200,000 new sign-ups at the time. “As these members entered the renewal rate calculation in the fourth quarter of fiscal 2024, the lower renewal rate for this cohort, typical of digital promotions, had a negative impact on the overall U.S. renewal rate. Outside of these filings, there have been no significant changes in the U.S. renewal rate.” Costco’s warehouse expansion resulted in 29 net new locations in fiscal 2024, including the opening of its first location in Maine, bringing the company’s U.S. footprint to 47 states was expanded. Management expects to add another 26 net new homes in fiscal 2025, with 12 of those locations outside the U.S. (Jim Cramer’s Charitable Trust is Long COST. See a full list of stocks here.) As a CNBC Investing subscriber If you’re with If you work with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim discussed a stock on CNBC television, he waits 72 hours after the trade alert is issued before executing the trade. THE INVESTING CLUB INFORMATION SET FORTH ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. THERE ARE NO fiduciary duty or duty IN RECEIVING YOUR INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.

Customers walk past the membership counter of a Costco store on July 11, 2024 in Richmond, California.

Justin Sullivan | Getty Images

Costco reported poor quarterly results on Thursday, with a small drop in sales more than offset by strong profitability and a rise in profits. The report didn’t blow us away, but it still gave us plenty of reminders of why Costco investors should stick around.

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We are increasing our price target for Costco after another stable quarter confirms our thesis

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Bronwen Cerys

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We are increasing our price target for Costco after another stable quarter confirms our thesis

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Bronwen Cerys

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