Costco Is Cruising Smoothly: Will Its Stock?



Strong growth trend

Costco (COST) stock has risen 5.9% since it reported better-than-expected fiscal third-quarter results on May 31.[1. Fiscal Q3 2018 ended May 13.] The stock has increased 12.8% YTD (year-to-date) as of June 21. Its peers Walmart (WMT) and Target (TGT) are entangled in a fierce battle with Amazon (AMZN), but Costco continues to report stellar sales and earnings growth.

Costco has reported double-digit sales growth in the past four quarters, while its earnings have grown at a strong double-digit rate in the past five quarters and outperformed its peers. The company’s industry-leading comps and a lower effective tax rate have been driving its sales and earnings higher. The graph below shows that Costco’s bottom line registered more than 20% growth in the past two quarters. Analysts expect the trend to continue in the near term.

Factors driving Costco’s superior growth

Costco continues to invest in price to widen the value gap with its peers, which seems to be working. Convenience and time-saving offerings are driving shoppers. However, its value proposition seems to be the most important factor driving sales.

The company’s unique value proposition is reflected in its high membership renewal rate, which was 90.1% at the end of its fiscal third quarter.

Costco’s square footage expansion and improved services, including faster checkout and returns, are expected to further support its sales growth rate. Increased membership fee income, efficient cost management, and lower taxes are likely to drive its earnings.

However, Costco lags its peers on the digital front, which is a concern for some investors. Its near-term margin headwinds could also play spoilsport.

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