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Costco Stock: Excellent Performance, Still Overvalued (NASDAQ:COST)


Costco Announces Raising Minimum Wage to $16 An Hour

Mario Tama/Getty Images News

This article was prepared by Jenny.T in collaboration with JR Research.

Investment Thesis

With 824 warehouses globally, Costco Wholesale Corporation (NASDAQ:COST) has proven itself to be a market-leading warehouse club since FY2016, while reporting an excellent YoY growth rate of 17.4% in FY2021. As a testament to its robust business model, COST has consistently outperformed consensus estimates in its quarterly earnings in the past three years, except for two missed quarters. In FQ1’22, the company reported revenue of $50.36B and net income of $1.32B, representing an excellent increase of 16.5% YoY and 12.8% YoY, respectively. Furthermore, COST is further expanding its digital offering as e-commerce continues to report exceptional YoY growth.

We discuss whether investors should add COST stock now. If you are new to COST, we encourage you to read our previous articles. They will help you understand its business model and market opportunity better. The links to the articles are appended:

COST Is Strengthening Its Digital Strategies To Ensure E-commerce Growth

In FY2021, e-commerce sales accounted for 7% of COST’s total revenue at $13.71B, compared with 6% in FY2020 at $10B. In comparison, e-commerce only accounted for 4% of the company’s sales in FY2019 at $6.1B of revenue. As a result, FY2021’s e-commerce sales represent a massive increase of 37% YoY and 224% from FY2019, mainly attributed to the pandemic.

Nonetheless, despite the reopening cadence, there seems to be sustained growth in COST’s e-commerce sales by 14% YoY in FQ1’22. It is evident that many of COST’s members love the convenience of online shopping at wholesale/ bulk prices. Nonetheless, the company sees the e-commerce segment as an additive to the company’s omnichannel strategy as most of the COST’s revenues are still from in-store purchases.

As part of its expansion, COST is looking to further improve its e-commerce mobile app experience while also linking its virtual membership card and its co-branded Citi Visa credit card. In addition, the company will double its e-commerce lockers and e-commerce kiosks in FY2022, for its buy-online-pickup-instore consumers. COST is also expanding its online offerings in Costco Next, where its members may purchase directly from trusted suppliers at a 20% discount.

These initiatives build upon the company’s concept of offering deep value to its members. As a result, we may expect continuous growth for COST’s e-commerce segment while promoting membership renewals moving forward. Nonetheless, we believe that COST’s most significant draw is still from in-store shopping as many members reverted from e-commerce post-pandemic.

COST Has Consistently Reported Compound Annual Growth Rate Of 10.53% Since FY2016

Costco Revenue & Net Income

COST Revenue & Net Income

S&P Capital IQ

Over the past five years, COST has reported steady growth at a CAGR of 10.53%. In FY2021, the company reported $195.9B of revenue, representing an increase of 17.4% YoY and 28.3% from FY2019. COST also reported a 23% YoY increase of net income in FY2021, from $4B to $5B. Consensus estimates a pull forward growth in FY2021 as vaccination rates rose and the reopening cadence gained speed.

Nonetheless, its growth does not seem to decelerate much post-pandemic as COST reported revenue of $50.36B in FQ1’22, representing an exceptional increase of 16.5% YoY and 35.9% from FQ1’20. In the same quarter, the company also reported a 12.8% YoY increase for its net income, from $1.17B to $1.32B. In addition, except for two missed quarters, COST has consistently outperformed estimates in its quarterly earnings for the past three years, with 20 upward revisions for revenue estimates. As a result, it is evident that the company is on a robust growth trajectory.

FQ1

COST Comparable Sales for FQ1’22

Seeking Alpha

In FQ1’22, COST reported an increase of 9.9% QoQ for US comparable sales while e-commerce increased by 13.3% QoQ, excluding the impact from gasoline prices and forex. COST had estimated YoY price inflation in the range of 4% to 5% in FQ1’22, which had affected raw materials, packaging supplies, labor, and transportation. Though the company had passed along some price increases, COST had also incurred a lesser price markup in order to keep its prices lower compared to its competitors.

As a result of its attractive pricing, the company reported that COST members are spending more per transaction at 3.5% in the US and 2.5% worldwide while there are also an increase in shopping frequency by 5.9% in the US and 6.8% worldwide in FQ1’22. It is evident that COST is a company that provides intrinsic value to its members by selling necessities at wholesale/ bulk prices.

Costco total membership growth

COST Total Membership Growth

Seeking Alpha

In FY2021, COST reported an increase of 5.7% YoY in total membership, with GOLD Star members accounting for the highest increase at 7.2%. In FQ1’22, the company reported a membership renewal rate of 89% worldwide and 91.6% in the US & Canada. There are also more renewals for executive members, which account for 42% of COST memberships and over 70% of its revenue. In the same quarter, its membership fees also had an increase of 9.9% YoY from $861M to $946M.

Costco Projected Revenue and Net Income

COST Projected Revenue & Net Income

S&P Capital IQ

Over the next four years, COST is expected to report steady revenue growth at a CAGR of 7.44% and net income growth at a CAGR of 8.29%. In FY2022, the company is expected to report annual revenue of $217.22B and net income of $5.68B, representing a YoY increase of 10.8% and 13.4%, respectively. The optimistic projection definitely shows the consensus’s confidence in COST’s growth moving forward.

Costco December 2021 comparable sales

Costco December 2021 Comparable Sales

Seeking Alpha

In addition, on January 2022, COST reported revenues of $22.24B for December 2021 ( five weeks ended 2 January 2022 ), which represented an increase of 16.2% YoY. Sales in the US represented the highest increase at 11.5%, compared to Canada and international sales, excluding the impact from gasoline prices and forex. E-commerce in December 2021 reported the highest increase at 17.8%, potentially attributed to Christmas shopping, compared to November at 12.2% and October at 16.5%.

Despite the concerns of the Omicron COVID-19 variant post-lockdown, it is evident that COST has been doing very well in both retail and e-commerce sales. Assuming that COST continues to report excellent sales moving forward, we expect the company to easily achieve the consensus estimates of $217.22B for FY2022 revenue.

COST’s Consistent Dividend Pay Out

Cost stock dividend yield and stock price (adjusted)

COST stock dividend yield and stock price (adjusted)

S&P Capital IQ

COST’s stock has had a robust long-term uptrend over the last five years, which has affected its dividend yield. COST’s current yield of 0.6% places is double of the consumer staples mean at 0.3%. The company has also consistently raised the dividend payout from $0.65 per share in February 2020 to $0.79 in November 2021. In addition, the company has paid out special…



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