Costco's (COST) reaping day is yet to come, with bigger gains anticipated this holiday season.
Adobe has recently projected U.S. online sales to reach $240.8 billion during the 2024 holiday season, marking an 8.4% year-over-year increase, according to thefly.com’s report on Sept. 25.
This growth signals a resurgence in consumer confidence as the U.S. economic outlook strengthens, which is expected to benefit major retailers like Walmart (WMT) and Costco.
The latest personal consumption expenditures data (PCE), the Fed's preferred measure of inflation, increased by 0.1% in August, bringing the annual inflation rate down to 2.2% from 2.5% in July. With the Fed's inflation target set at 2%, this decline reinforces the view that the U.S. economic landscape is stabilizing.
Costco has been reinforcing its resilience by lowering prices, which resonates with rivals like Walmart and Target (TGT) .
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“Our goal is always to be the first to lower prices where we see the opportunities to do so,” said Chief Financial Officer Gary Millerchip during the earnings call. He cited Costco’s Kirkland Signature Boneless Chicken Tenders, where a 13% price reduction resulted in a 21% increase in pounds sold.
Costco reveals new shopper trends
Costco posted an earnings beat and slight revenue miss for its fiscal fourth quarter, causing shares to drop less than 2% on Sept. 27, indicating that investors continue to believe in the retailer’s potential.
The company earned $5.29 a share for the quarter ended Sept. 1, surpassing analysts’ expectations of $5.08 per share. However, revenue came in at $79.7 billion. The consensus estimate had been $79.9 billion.
Same-store sales, a key metric for retailers, increased 5.4% from a year ago, yet missing the estimates for a 5.7% increase. Same-store sales compare results of stores that have operated for more than one year.
Costco is seeing two patterns among customers.
Shoppers are resuming spending on non-food merchandise. “We have seen inflation dissipate, and our members have started to spend more on non-food,” Millerchip said in the company’s earnings call, citing that “nonfoods led the way with the highest comparable sales in Q4.”
Costco is seeing more younger customers. The evidence is growth in annual membership fees among this group. A good metric for the future, it signals sustainable profit growth from membership fees.
Related: Analysts reset Costco stock price targets ahead of earnings
“We ended Q4 with 76.2 million paid household members, up 7.3% versus last year and 136.8 million cardholders, up 7% year over year. About half of new member sign-ups in fiscal year 2024 were under 40 years of age,” Millerchip said. “This percentage has been growing since Covid and has lowered the average age of our members over the last few years.”
Costco’s membership revenue reached $4.8 billion for fiscal year 2024, up 5.4% from fiscal 2023. The company raised its membership fees starting Sept.1, its first hike since 2017. But the new fee structure contributed only a small amount to the increase.
Analysts lift Costco stock price target after earnings
At least nine analysts raised Costco’s stock price target after earnings.
DA Davidson raised Costco's price target to $880 from $780 while keeping a neutral rating, citing "mixed" Q4 results.
“The company's membership fee income growth was a bit below consensus, though the growth rate remains solid and its overall gross margins were better than expected,” the analyst tells investors in a research note pulled by thefly.com. But the report added that Costco's offering continues to resonate with consumers.
Truist raised its Costco price target to a higher $909 from $873 and keeps a hold rating.
The analyst says its Q4 results were "strong" as sales remain robust, and its stacked growth rate is the strongest and most consistent within the firm's coverage. However, the analyst warns that Costco’s valuation is still "extremely stretched."
The late Charlie Munger, Warren Buffett’s late right-hand man, was a Costco director for more than 25 years. He also had warned of Costco’s expensive price-earnings multiple. “The trouble with Costco is it’s 40 times earnings. But except for that, it’s a perfect damn company,” he said in 2023. (Yahoo Finance pegged the current forward p/e multiple at 50.25 as of Sept. 27. Its trailing 12-month p/e was 53.48.)
Loop Capital analyst Laura Champine raised Costco's price target to $1,005 from $975 and keeps a buy rating.
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Champine notes that Costco is attracting significant customer traffic to its shopping clubs, with no significant drop in renewal rates despite the fee increase.
Additionally, Costco's e-commerce is showing robust growth, with a 20% rise in core sales, particularly in categories like appliances and home furnishings, which Loop Capital suggests are nearing a cyclical low.
Costco traded down 1.75% at $885.62 on Sept. 27. The shares are up 34.2% year-to-date, while the S&P 500 index is up 20.3%.
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