Retail giant Costco (NASDAQ:COST) has established itself as a juggernaut warehouse club. Its wide moat, consistent performances, and robust balance sheet have awarded it a premium valuation over the years. Its recent operating results suggest that the company isn’t slowing down anytime soon. COST stock, on the other hand, does seem to be slowing down, and perhaps it’s best to wait for a deeper retracement before investing in it.
Costco is the largest discount retailer operating over 800 warehouses globally. It has its membership warehouse in multiple countries, including the U.S., Japan, U.K., Spain, Australia, and others. With its stellar top and bottom-line expansion in the past several years, it is among the top two companies by market capitalization in the consumer-staples industry.
For the longest time, the company’s lofty valuation has been a bone of contention. However, with its incredible outlook and fundamentals, it’s tough to deny it a premium valuation. Nevertheless, it’s better for COST stock to bottom out before investing in it.
Strong Moat for Cost Stock
Costco has established itself as a market-leading discount retailer. Its ability to offer incredibly low prices has enabled it to maintain mind-boggling membership retention rates. It relies on few suppliers, which keeps stock-keeping units low and ultimately lowers handling costs. This buying leverage enables Costco to sell items for significantly cheaper than other retailers. Customers are compelled to return as they fail to find better deals elsewhere.
The company has over 62 million households in its membership program with a 91% renewal rate in the U.S. and over 88% internationally. It increased its membership fees by roughly 9.5%, creating over $3.8 billion in revenue streams. Though these membership fees may amount to a minuscule portion of revenues, they represent approximately 77% of net income.
Hence, Costco’s membership program is a core component of its business which helps boost profits consistently. The recurring incomes help improve consistency in cash flows and sales predictability.
Costco has been an exceptional performer for the past several years. It has reported steady growth in its top and bottom lines, resulting in a healthy increase in operational cash flows. Its five-year revenue growth has averaged at 9.95%, with an earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of 13.47% during the same period.
Last year, the company grew its revenues by 17.4% from 2020 to roughly $196 billion. Moreover, it reported a healthy 25% increase in net income for the year. Additionally, the company is off to a tremendous start this year, registering a 17.5% increase in revenues to $50.36 billion during the first quarter. It also widened its net income by 12.8% to $1.32 billion. It can easily achieve consensus estimates of roughly $217 billion in revenues this year at the current rate.
eCommerce sales have been a major plus point for the company, accounting for 7% of its total revenues last year. eCommerce accounted for just 4% of Costco’s revenues in 2019. eCommerce sales last year increased by 44% from the prior-year period and by over 200% from 2019. Moreover, despite the slowdown in pandemic-related tailwinds, the company’s eCommerce sales rose by 14% on a year-over-year basis during the first quarter. These strong numbers indicate how the company’s members enjoy the convenience of online retail at affordable prices.
Bottomline On COST Stock
Costco has been a consistent performer for its stockholders over the past several years. It has weathered many crises and continues to expand its business incredibly. However, its parabolic valuation is a bit of a pain for potential investors. While COST stock has shed a fair bit of its value of late, it’s perhaps still best to wait for a deeper correction before investing in it.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.