[Note: Costco’s fiscal year ends in August]
Costco (NASDAQ: COST) is scheduled to report its fiscal fourth-quarter results on Tuesday, September 26. We expect Costco stock to likely see little movement due to revenue slightly beating expectations and earnings coming in line. It is worth pointing out that despite the pandemic and inflation, the business has managed to grow. Consumers loaded up on essentials in high quantities to keep costs low. Costco stands out from other retailers as it makes a majority of its profits from its membership income, so comparable sales growth isn’t as important for it as it is for other retailers. In Q3, membership fee income was 6% higher than the prior-year period. Card members increased by 7% over last year in the third quarter and the renewal rate remained strong, at 92.6% in the U.S. and Canada. This high renewal rate not only ensures a steady stream of revenue from membership fees but also increases the lifetime value of each customer. We need to keep an eye on this metric when calculating Costco’s long-term growth potential. Also, Costco currently boasts nearly $14 billion in cash, cash equivalents, and short-term investments. Its long-term debt is only $6.5 billion, so Costco has a net cash position on its balance sheet. That said, the retailer’s consistent performance at driving revenue coupled with its dedication to enhancing customer experience, reflects its ability to thrive in the ever-changing retail landscape.
Our forecast indicates that Costco’s valuation is $564 a share, which is almost in line with the current market price. Look at our interactive dashboard analysis on Costco‘s Earnings Preview: What To Expect in Fiscal Q4? for more details.
Notably, COST stock had a Sharpe Ratio of 0.9 since early 2017, which is higher than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
(1) Revenues expected to be slightly ahead of consensus estimates
Trefis estimates COST’s FQ4 2023 revenues to be $78.5 Bil, marginally higher than the consensus estimate. In Q3, Costco’s revenues grew 2% year-over-year (y-o-y) to $53.6 billion. Costco showed weaker than usual year-over-year comp store sales growth in Q3 at just 0.3%. This was driven by weakening demand for high-ticket discretionary items, thus lowering the average ticket, which dropped 4.3% y-o-y. The lower average ticket was offset by higher traffic volumes which grew 4.8% y-o-y. For the full-year 2023, we expect Costco’s Revenues to grow 7% y-o-y to $241.8 billion.
2) EPS likely to match consensus estimates
COST’s FQ4 2023 earnings per share (EPS) is expected to be $4.77 per Trefis analysis, almost matching the consensus estimate. In the third quarter, Costco’s earnings per share fell from $3.04 last year to $2.93 this year, due to supply chain pressure.
A membership fee increase is unlikely this year because of high inflation, but it will happen sooner rather than later. Costco generally raises its membership fees every five years, last raised in 2017. This should help the company boost its bottom line further.
(3) Stock price estimate in line with the current market price
Going by Costco’s valuation, with an EPS estimate of around $14.08 and a P/E multiple of 40.0x in fiscal 2023, this translates into a price of $564, which is almost in line with the current market price. Costco’s ability to generate higher sales consistently, as well as turn them into profits, has impressed investors, and this has led to an elevated P/E as compared with its peers even before the pandemic when it hovered around 30x.
It is helpful to see how its peers stack up. COST Peers shows how Costco’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.
|S&P 500 Return||-4%||13%||93%|
|Trefis Reinforced Value Portfolio||-6%||23%||532%|
 Month-to-date and year-to-date as of 9/25/2023
 Cumulative total returns since the end of 2016