Wholesale warehouse operator Costco Wholesale Corporation (COST -1.38%) has been a stunning success over the past thirty years. Its stock price performance has been noteworthy compared to all stocks, but especially so in comparison to retail stocks. Costco's focus on warehouses that save its customers time and money has been a stellar success. With the stock up over 2,500% since 2003, it is a proven winner. However, the company has experienced several changes in the last year, making this a great time to review Costco as a potential investment.
Changes in leadership and membership fees
Changes of note to customers and investors include a new CEO and updated membership fees. Effective Jan. 1, 2024, longtime CEO Craig Jelinek stepped down and was succeeded by Ron Vachris. This change should be considered a preservation of continuity, since the new CEO has been with Costco for over 40 years. He has been working closely with the outgoing CEO for nearly two years prior to assuming his new role. Investors should have no concerns about the continued competence of management.
The membership fee increases were the the company's first since 2017, and were were less expected. The increases will directly affect Costco's customers, raising prices by $5 and $10 per year at its two membership levels. People don't enjoy fee increases, of course, so this change at least has the potential to disrupt Costco's operations if they experience an overall decline in membership. However, given the generally high regard members have for Costco, and the relative in-frequency of membership rate increases in the past, it seems unlikely that the firm will lose many members due to the most recent price hike. Still, the potential exists, and investors must take such a chance into consideration when valuing Costco as an investment.
Costco continues to deliver stellar operating performance
The company reported solid earnings for the third quarter of its 2024 fiscal year. The earnings report showed growth across the board:
- Net sales increased 9.1% to $4.79 billion
- Net income increased $380 million, or 29%, to $1.68 billion
- Comparable location sales were up 6.5% on an adjusted basis
Importantly, these quarterly results do not reflect the recent membership fee increase. The results do demonstrate that Costco's loyal customers continue to rely on the retailer under the company's new CEO. However, considering Costco stock is up over 2,500% since 2003, and 50% in the last 12 months, investors likely consider results like this baked into current share prices. Continued growth from these levels might require even more impressive growth.
New growth for Costco may come from international expansion
Given the importance of membership fees to Costco, investors must consider whether substantial growth in new members is possible or likely. With Walmart (NYSE: WMT) and Sam's Club, Target (NYSE: TGT), and Amazon (NASDAQ: AMZN) all also competing for much of the same customer base, particularly in the United States, a large increase in memberships seems unlikely over the next several years.
Increases in membership fees can add to Costco's top and bottom line. Since the company has previously stated that its member renewal rate is 90%, it seems unlikely that the company will lose a significant portion of its member base for $5 or $10 a year. This means the company should enjoy a boost in cash flows just from the recent increase.
To make more substantial increases, though, Costco is appealing to an entirely separate pool of potential members: The rest of the world outside the United States. In the 2023 fiscal year, Costco opened a total of 23 net new locations, 10 of which were outside of the United States. Clearly, Costco is moving with caution on its international expansion. This should be good news for investors. Management has proven to be a slow and steady winner for the past 30 or more years; there is no reason to doubt its ultimate success in expanding Costco's international presence.
In terms of valuation, Costco appears to be fully valued based on the business as it currently stands.
| Ticker | Price-to-Earnings Ratio | Price-to-Free Cash Flow Ratio | Dividend Yield | Dividend Coverage Ratio |
|---|---|---|---|---|
| COST | 36.1 | 67.0 | 0.71% | 3.9 |
Data source: YCharts.
Though the yield is not very large, the company pays a substantial dividend and it is very well covered, making it attractive to income investors. Growth investors with patience should consider adding shares of Costco. The dividend can help reward patient investors who hold shares while waiting for growth in international membership.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Joseph Arroyo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.
