Has Costco Stock Run Its Course for Now?

Costco COST has been a big winner so far this year. Consumer staples stocks have generally had a good year, with the Consumer Staples Select Sector SPDR Fund XLP providing a total return of 15%. However, that still lags the over 20% return of the S&P 500.

Costco has particularly impressed. Its 33% total return this year surpasses its sector and the industry by a wide margin. So, what has been driving Costco's recent success, and is there still room for this stock to run?

Breaking Down Costco's Revenue Streams

Most everyone knows about Costco's business model. The company buys and sells items in massive bulk quantities, allowing it to give customers volume discounts. Particularly for large families, this makes Costco an attractive place to buy groceries.

On top of selling goods, the company also charges annual fees that allow its members to shop at the store. However, these fees make up a small amount of the company's revenue, at around 2% of the total. Food makes up the majority of the company's revenue at 53% in 2023, followed by non-food goods like appliances and electronics at 25%.

The last 20% comes from its "warehouse ancillary and other business" segment. This includes things like gasoline, pharmacy, and food court sales. It derives revenue primarily from the United States, which made up 73% of total revenue by geography in 2023.

Costco is Beating the Competition in Core Sales Growth

One of the biggest reasons for Costco's strong returns this year has to be the company's comparable store sales growth. This measurement excludes sales from newer stores, as opening a new store is an easy way to boost sales. Looking at this figure shows a more sustainable measurement of the company's ability to increase revenue.

In comparison to its rivals, Costco is winning on this front in 2024. Target TGT has overall seen a sizable decline in same-store sales this year, and Kroger KR has managed to achieve just slightly positive growth. Walmart WMT is doing well, with low double-digit growth. However, Costco's mid-teens growth is the strongest of these firms, and growth has especially picked up in the last two quarters. However, Costco's stock price has only risen slightly since mid-Aug., while Walmart's is up another 20%.

Walmart's 52% price appreciation this year leads the group. Part of this divergence may be the fact that Walmart has increased its margins in a much stronger way amid its sales growth. The firm improved operating margin and gross margin by 45 basis points and 30 basis points last quarter, respectively. Those increases for Costco were just 7 and 13 basis points.

Analysts are Mixed On Costco, but Aren't Signaling Near-Term Concern

Looking at analyst ratings and price targets on Costco, the views are mixed. Its 23 buy ratings outpace its 13 hold and one sell rating, but the average price target isn't all that inspiring. The figure indicates just around 6% implied upside in the stock, a number that suggests the company is within the fairly valued range at this point.

However, it's interesting to note that at least 10 Wall Street analysts raised their price targets after the company's Sept. 27 earnings report, and none appear to have lowered their target. Yet, shares are down 3% since the release as the company missed on sales growth estimates. This comes despite knowledge that the dockworkers' strike was imminent and has now begun. These signals analysts aren't too worried about the strike having a negative impact on the company.

Overall, Costco remains a company with strong fundamentals that has shown it can thrive while some of its competitors face slow or declining growth. Its membership-based business model keeps customers coming back, and the firm should be able to realize benefits from its increased membership prices in late 2025.

Another plus for Costco is that it can significantly grow its e-commerce business. E-commerce makes up a smaller portion of the company's business compared to Walmart. The e-commerce part of the business is growing at a solid rate of around 20% over the last two quarters.

What will happen in the short term for the company is hard to predict but estimates of earnings growth over the mid-term are strong. Over the next five years, analysts expect the company to grow adjusted earnings per share by over 10% annually.

The article "Has Costco Stock Run Its Course for Now?" first appeared on MarketBeat.