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Why Costco (COST) Stock is a Smart Long-Term Investment

Costco Wholesale Corporation COST, an “all-weather” stock, has withstood multiple market gyrations and delivered returns to investors. A resilient business model enables it to gain market share and generate profits. This operator of membership warehouses has exhibited a decent run on the bourses and has outpaced the industry over the past year.

Shares of this Zacks Rank #3 (Hold) company have appreciated about 62.1% in the said period compared with the industry’s rise of 37.4%. Trading at $848.31 as of Jun 21, Costco's shares are near their 52-week high, and the stock could likely surpass this mark.

Reflecting the positive sentiment around Costco, the Zacks Consensus Estimate for earnings per share has seen upward revisions. Over the past 30 days, analysts have increased their estimates for the current fiscal year by 0.8% to $16.16 per share and for the next fiscal year by 1.3% to $17.58 per share. These estimates indicate expected year-over-year growth rates of 10% and 8.8%, respectively. The numbers reinforce confidence in the stock.

Striking the Right Chord With Consumers

Costco continues to be one of the dominant warehouse retailers based on the expanse and quality of merchandise offered. A customer-centric approach, strategic pricing, merchandise initiatives and an emphasis on memberships have helped Costco post consistent sales growth.

Costco’s net sales for May increased by 8.1%, reaching $19.64 billion, up from $18.16 billion in the same period last year. This follows improvements of 7.1% in April and 9.4% in March, reflecting a strong and consistent sales performance over the past few months. Comparable sales for the four weeks ended Jun 2, 2024 advanced 6.4%. This followed an increase of 5.6% in April and 7.7% in March.

The company's distinctive membership business model and pricing power set it apart from traditional players. Low-to-middle-income consumers have preferred discount stores over conventional retailers to meet their day-to-day needs. We believe a growing customer base and high renewal rates should fuel sales. We expect a 5.1% and 4.5% jump in comparable sales in fiscal 2024 and 2025, respectively.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Impressive Membership Growth

One of Costco's unique strengths is its membership-based business model. The company boasts high membership renewal rates, often exceeding 90%, which indicates strong customer loyalty and a steady stream of recurring revenues. Membership fees provide a stable income regardless of economic conditions.

We anticipate Costco's total paid membership to reach approximately 76 million by the end of fiscal 2024, marking a 7% increase from fiscal 2023. Additionally, we estimate a 5% rise in total membership fees for the current fiscal.

Omnichannel Mantra

Costco's digital and e-commerce initiatives continue to gain traction, contributing to overall sales growth. Total e-commerce sales grew 20.7% during the third quarter of fiscal 2024.

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Deliveries through Costco logistics rose 28% in the quarter. Costco Next, the curated marketplace, added eight new vendors, bringing the total to 75. App downloads increased 32% year over year, and site traffic jumped 16%, reflecting Costco's successful digital engagement strategies. The expansion of the partnership with Uber Eats to cover all of Canada and 17 U.S. states enhances Costco's delivery capabilities and customer convenience, potentially driving further e-commerce growth.

The company has been gradually expanding its e-commerce capabilities in the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia.

Enough Liquidity

Costco’s sturdy balance sheet equips it to deal with cyclical downturns and tap growth opportunities. Solid cash flow generation allows it to raise dividends consistently. The company generated an operating cash flow of $8,381 million for the 36 weeks ended May 12, 2024.

Costco has always been a favorite pick for investors seeking steady income and growth. This Issaquah, WA-based company, with a strong history of dividend payments and sound fundamentals, provides a hedge against any odd swings in the stock market. COST’s payout ratio is 29, with a five-year dividend growth rate of 11.7%.

3 Stocks Looking Red Hot

Here, we have highlighted three better-ranked stocks, namely Vital Farms VITL, Sprouts Farmers Market SFM and Tractor Supply Company TSCO.

Vital Farms offers a range of produced pasture-raised foods. It currently sports a Zacks Rank #1 (Strong Buy). VITL has a trailing four-quarter average earnings surprise of 102.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Vital Farms’ current financial-year sales and earnings suggests growth of 22.5% and 59.3%, respectively, from the year-ago reported numbers.

Sprouts Farmers, the renowned grocery retailer, currently sports a Zacks Rank #1. SFM has a trailing four-quarter earnings surprise of 9.2%, on average.

The Zacks Consensus Estimate for Sprouts Farmers’ current financial-year sales and earnings implies growth of around 8% and 9.9%, respectively, from the year-ago reported numbers.

Tractor Supply Company, which operates as a rural lifestyle retailer, currently carries a Zacks Rank #2 (Buy). TSCO has a trailing four-quarter earnings surprise of 2.7%, on average.

The Zacks Consensus Estimate for Tractor Supply Company’s current financial-year sales and earnings calls for growth of around 3% and 2.5%, respectively, from the year-ago reported numbers.

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Tractor Supply Company (TSCO) : Free Stock Analysis Report

Costco Wholesale Corporation (COST) : Free Stock Analysis Report

Sprouts Farmers Market, Inc. (SFM) : Free Stock Analysis Report

Vital Farms, Inc. (VITL) : Free Stock Analysis Report

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Zacks Investment Research