What Is Driving Our $212 Price Estimate For Costco?

by Trefis Team
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Costco‘s (NASDAQ:COST) 2018 performance has been mostly above its guidance and market expectations. Costco has had a productive year so far, with an 8% and a 10% gain in same-store sales in the quarters ending February and May, respectively. In addition, the company has continued to add members, while maintaining a retention rate of around 90% over this period. This is significant because Costco relies heavily on its membership fees, despite the fact that these fees account for only 2% of the company’s total revenues. The company’s membership fees contribute around 17% of the company’s value, per our estimates, given the low costs associated with this revenue stream. Like other large retailers, Costco makes small margins on most of its items in its stores, and the membership fees help offset these low margins. Paid memberships at Costco have grown at a CAGR (compounded annual growth rate) of 5.2% over the past two years to 49.4 million in fiscal 2017 (year ended September 2017). We forecast the company’s revenue from membership fees to grow at a similar rate in fiscal 2018 as well. Overall, the retailer’s continued growth momentum confirms that it should be able to continue to see healthy traffic at its brick and mortar warehouses despite stiff competition in the grocery sector in the long run.

We have a $212 price estimate for Costco, which is about in line with the current market price. Our interactive dashboard details our forecasts and estimates for the company. Below we outline the key drivers of our price estimate.

Overview Of Estimates

We expect Costco to generate around $141 billion in revenues in calendar year 2018, and earnings of almost $3 billion. Our revenue forecast of $141 billion represents year-on-year growth of around 5%. Of the total expected revenues in 2018, we estimate $82 billion in the Costco U.S. business, almost $32 billion for the Costco International business, nearly $25 billion for the Ancillary business, and close to $3 billion in membership income.

Costco has also been able to grow its e-commerce comparable sales gradually from 26% in August 2017 to 33% in May 2018. The company is driving online sales with ongoing site improvements, improved online marketing activities, and distinct products and services. The retailer also rolled out two online delivery related offerings on dry and fresh grocery. However, it should be noted that Costco’s model works on thin margins and large volumes, and therefore the company is not keen on selling smaller quantities online. Given the fact that Costco has been able to grow its revenues and comparable sales with its model, without a strong focus on e-commerce, suggests that Costco is likely to be the least affected retailer in the Amazon-dominated retail industry going forward.

Costco’s Operating Divisions Forecast

We have calculated Costco’s total revenue in CY 2018 by estimating the revenues from the company’s domestic sales, international sales, ancillary sales and membership income. We expect Costco’s 2018 store count in the U.S. to be over 520, with an average square footage per store of 148k and revenue per square foot of $1049, translating into $82 billion (+3% y-o-y) in domestic revenues in 2018. In addition, we also expect close to 240 stores in international markets with an average square footage per store of 148k and revenue per square foot of $940, translating into $32 billion (+8% y-o-y) in international revenues in the same period. On similar lines, we expect Costco’s ancillary revenues to reach $24 billion (+9% y-o-y) in 2018, with 753 warehouse clubs and $32 million in revenue per square feet.

Costco saw its stock gain nearly 15% in 2017, and is up more than 10% year-to-date as of July 11. Much of the stock increase was due to the company’s strong growth in comparable sales in the U.S. and other international markets. Going forward, we expect the company to grow at a similar pace as that of 2017, as it continues to invest in its people and technology.

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