Costco(NASDAQ: COST) is one of those rare businesses that does an excellent job satisfying all its stakeholders. Shoppers love its treasure-hunting atmosphere and low prices, employees stick around for far longer than the industry average, and the chain's investors have been rewarded for patiently holding the stock. Costco shares have returned more than 15% per year for nearly 40 years, in fact, enough to create many millionaires since its 1985 initial public offering.
Investing is all about the future, though, and there are limits to Costco's growth potential from here. Shares are trading near a record high valuation, and so it's reasonable to wonder whether you'll get good returns from buying the stock right now. Despite those challenges, Costco stock should be a good addition to most investors' portfolios. Here's why.
Engagement is high
The foundation of any retailer's strength is the level of engagement it can keep with its core shoppers. With inflation soaring, this past year has tested Costco along with all of its peers on this point, and the warehouse retailing giant has aced that test. Comparable-store sales growth remained steady in 2023 and accelerated to an 8% increase in early 2024.
There's an even better metric to judge the chain, though, and that's its renewal rate. As a membership club, it's critical that Costco convince its existing membership base to continue paying its annual fees. A record 92% of subscribers are choosing to renew today, meaning shoppers believe they are getting plenty of value from the service.
Margins are steady
Costco isn't the stock for you if you prioritize high profits. In fact, the chain easily generates the lowest gross profit margin among national retailers. Earnings don't tend to spike during high growth periods, either. That's because Costco's management team takes the chain's price leadership selling approach seriously and chooses to redirect most excess cash toward reducing prices even further.
COST Net Income (TTM) data by YCharts
Still, you'll see much more stability when owning Costco's stock than you'd expect from a retailing business. That's a valuable prospect for investors who've been burned by sharp profit drops by peers such as Target in the past.
About that stock price
As you might expect, you'll have to pay a premium to own a business that has this much going for it. Costco shares are priced at 1.3 times revenue, or about twice the valuation of peers Target and Walmart. Its premium is sitting near an all-time high currently while these competitors are far off of their record levels. That means there's a higher risk that you'll overpay for this highly successful business.
That's a risk worth taking for most investors. Of course, if you're more cautious, then you might want to watch the stock in hopes that a market downturn will bring about a cheaper starting price. Keep in mind that Costco rarely trades at a significant discount, though. There have only been a few times in the past 3 years that you could buy the retail stock for less than 1 times annual sales.
If you're seeking an industry leader with fantastic brand strength, steady earnings growth, and solid (if unpredictable) dividend income, then look no further than Costco stock. It's a great business that's trading at a decent price today.
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Demitri Kalogeropoulos has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.
