A Look At Costco’s Valuation

by Trefis Team
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Costco‘s (NASDAQ: COST) fiscal 2018 performance has been mostly above its guidance and market expectations. The company has had a productive fiscal year thus far, with a 10% gain in same-store sales and a 10% year-over-year (y-o-y) growth in total revenues over the first three quarters. Costco relies heavily on its membership fees, despite the fact that these fees account for just 2% of the company’s total revenues. The company’s membership fees contribute around 17% of its total value, per our estimates, given the low costs associated with the revenue stream. Like other large retailers, Costco makes small margins on most 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 at the end of fiscal 2017. We forecast the company’s revenue from membership fees to grow at a similar rate for full-year 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 summarized our forecasts for Costco’s fundamental value based on expected 2018 results in an interactive model. You can modify assumptions such as changes in expected segment revenue or EBITDA margins to see how they impact the company’s value. The image below shows one of the key steps in identifying Costco’s valuation sensitivity to changes in its segment revenues. We detail how changes in revenue or segment EBITDA margin impacts total EBITDA, which then impacts its enterprise value (assuming a constant EBITDA multiple).

Costco saw its stock grow nearly 15% in 2017, and is now up more than 25% over the course of 2018. Much of the stock increase was due to the company’s strong growth in comparable sales in the U.S. and other international markets. We have maintained our long-term price estimate for the company at $233, which is about in line with the current market price. The biggest positive takeaway from the Costco’s growth story is the increase in its domestic comparable sales. The company’s U.S. comparable sales growth have more than doubled in fiscal 2018 – from 4% to 9%. Costco has also been able to grow its e-commerce comparable sales gradually from 30% in September 2017 to 43% in May 2018. However, the online comparable sales came down to 24% in August. The retailer 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 for dry and fresh grocery.

Our forecasts for the year are summarized in our dashboards for Costco. If you have a different view, you can modify various inputs to see how updated inputs impact the company’s valuation. You can also share the links to scenarios created on our platform.

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