7 Nov

Could Costco’s Faster Comps Growth Boost Its Stock?

  • Costco announced its October comps data yesterday. Its comps growth increased and its domestic sales sustained their momentum.
  • COST stock has outperformed broader markets and is up about 48% year-to-date.

Costco (COST) announced its comparable sales data for October after markets closed yesterday. The company’s comps growth accelerated in October, thanks to its domestic business’s continued momentum. We think the news should please investors and boost COST stock, but its high valuation could limit any upside.

The retailer’s October comps are especially encouraging, given that it was up against a tough YoY (year-over-year) comparison. Costco’s comps have continued to outgrow peers’.

Costco’s October comps

Costco’s comps increased by 5.7% in the four weeks ended November 3, compared with 4.2% in September and 8.6% last October. Moreover, its net sales rose 6.8% to $11.92 billion in October.

The company’s domestic sales sustained their momentum despite high competition, and grew from the month prior. In October, its US comps increased by 6.5%, reflecting traffic and ticket size growth. Costco’s comps have grown more than 5% in the last four months.

Meanwhile, its Canadian and international comps grew 4.9% and 2.1%, respectively. Its e-commerce sales increased by 16.5%.

Excluding foreign exchange and gasoline price volatility, Costco’s overall comps rose 6.3%. Its US, Canadian, and international comps increased by 6.8%, 6.5%, and 3.0%, respectively.

Will COST stock rise further?

The fact that Costco has achieved mid-to-high-single-digit comps growth despite a tough comparison could boost its stock. Costco’s value proposition and expanded offerings have continued to drive traffic. However, we foresee its EPS growth moderating in future quarters. Analysts expect Costco’s EPS growth to decelerate sequentially to mid-single-digit growth.

Costco’s high valuation and EPS growth moderation could limit any upside in its stock. COST’s forward PE multiple of 34.0x is significantly higher than peers’ average of 21.6x.

Competition could also limit Costco. Amazon (AMZN) continues to reduce delivery times and has removed the Amazon Fresh delivery service fee for Prime members. The e-commerce giant is investing heavily in expanding its delivery capabilities to make one-day delivery a standard for Prime members. Walmart (WMT) and Target (TGT) have also stepped up their delivery capabilities, boosting their traffic and comps.

This year, COST stock has risen 48%, outperforming broader markets by a wide margin. The S&P 500 has risen 22.7% year-to-date.

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