Costco Wholesale Corp. (COST) is expected to see substantial gains during the upcoming holiday season, driven by strengthening consumer confidence and favorable economic conditions.
U.S. Holiday Sales Surge Expected
Adobe has projected that U.S. online sales will hit $240.8 billion during the 2024 holiday season, an 8.4% increase from the previous year. This indicates a resurgence in consumer confidence, benefitting major retailers like Costco and Walmart (WMT).
Recent data from the Personal Consumption Expenditures (PCE) index, the Federal Reserve’s favored inflation gauge, showed a modest 0.1% rise in August. The annual inflation rate now sits at 2.2%, down from 2.5% in July, inching closer to the Fed’s 2% target. This trend suggests that the U.S. economy is stabilizing.
Costco’s Strategic Price Reductions
Costco has continued to demonstrate resilience by lowering prices, staying competitive with rivals like Walmart and Target (TGT). Chief Financial Officer Gary Millerchip highlighted this during an earnings call, stating, “Our goal is always to be the first to lower prices where we see opportunities.” He pointed to a 13% price cut on Kirkland Signature Boneless Chicken Tenders, which led to a 21% increase in sales volume.
Earnings Beat Despite Slight Revenue Miss
In its fiscal fourth quarter, Costco reported earnings of $5.29 per share, surpassing analyst expectations of $5.08 per share. However, revenue fell slightly short of forecasts, coming in at $79.7 billion compared to the consensus estimate of $79.9 billion. This earnings beat helped limit the stock’s decline to under 2% following the report, as investors remain optimistic about Costco’s long-term potential.
Same-store sales, a crucial indicator of retail performance, rose 5.4% year-over-year, although this fell short of the anticipated 5.7% growth. Same-store sales compare performance at locations that have been open for at least one year.
Consumer Trends: Spending And Membership Growth
Costco has identified two key trends among its customers: a return to spending on non-food items and an influx of younger shoppers. “We have seen inflation dissipate, and our members have started to spend more on non-food,” said Millerchip, noting that non-food items posted the highest comparable sales in the fourth quarter.
Additionally, younger customers are driving membership growth, which signals long-term profitability. Millerchip reported, “We ended Q4 with 76.2 million paid household members, up 7.3% from last year. About half of the new member sign-ups in fiscal year 2024 were under 40 years of age.” This younger demographic has steadily grown since the pandemic, lowering the average age of Costco members.
Membership revenue reached $4.8 billion in fiscal 2024, a 5.4% increase from the previous year. Costco also raised its membership fees on Sept. 1, the first hike since 2017, although this contributed only marginally to the revenue increase.
Analysts Raise Costco Stock Price Targets
Following Costco’s earnings report, at least nine analysts raised their price targets for the stock.
DA Davidson increased its target from $780 to $880 while maintaining a neutral rating, citing “mixed” fourth-quarter results. The firm noted that while Costco’s membership fee income growth was slightly below expectations, overall gross margins were better than anticipated. Davidson emphasized that Costco’s value proposition remains compelling for consumers.
Truist also raised its price target, moving it from $873 to $909 while keeping a hold rating. The firm described Costco’s fourth-quarter performance as “strong,” with robust sales and consistent growth. However, Truist warned that the stock’s valuation remains “extremely stretched,” with its price-to-earnings (P/E) ratio seen as high.
The late Charlie Munger, Warren Buffett’s long-time business partner, had also cautioned about Costco’s valuation. “The trouble with Costco is it’s 40 times earnings. But except for that, it’s a perfect damn company,” Munger remarked in 2023. As of Sept. 27, Yahoo Finance pegged Costco’s forward P/E multiple at 50.25, with a trailing 12-month P/E of 53.48.
Loop Capital analyst Laura Champine raised her price target for Costco to $1,005 from $975, maintaining a buy rating.
Conclusion
Costco’s ability to navigate changing consumer trends, coupled with its strategic price cuts and strong membership growth, has kept analysts optimistic about the retailer’s future. As the holiday season approaches, investors will be watching closely to see if Costco can continue its upward trajectory amidst a stabilizing economic environment.
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