Over the past five years, Costco‘s (NASDAQ: COST) stock rallied 174% as the S&P 500 rose 86%. The warehouse retailer crushed the market even as the pandemic, inflation, rising interest rates, geopolitical conflicts, and other macro headwinds rattled the global economy.
That was a great run, but can Costco keep outperforming the market over the next five years? Let’s review its business model, growth rates, and valuations to decide.
Image source: Getty Images.
Costco’s members pay annual fees to shop at its warehouses, and those high-margin fees allow it to sell its products at nearly break-even margins. To keep its prices low, it leverages its scale to negotiate bulk rates with its suppliers. It also limits its markups while promoting its own private label, Kirkland, as a cheaper alternative to name brands.
Costco carries a narrower selection of products than traditional big box retailers, but it frequently rotates its products with a “treasure hunt” strategy to draw shoppers back to its stores. Its food court, gas stations, vision center, hearing center, and other ancillary services make its memberships even stickier.
Costco’s business will stay healthy as long as its comparable sales rise, it opens more warehouses, it gains more cardholders, and it locks them in with high renewal rates. All four of those metrics increased at a healthy clip from fiscal 2020 to fiscal 2024 (which ended last September).
Metric
FY 2020
FY 2021
FY 2022
FY 2023
FY 2024
Adjusted* Comps Growth
9.2%
13.4%
10.6%
5.2%
5.9%
Total Warehouses
795
815
838
861
890
Total Cardholders
105.5M
116.1M
118.9M
127.9M
136.8M
Global Renewal Rate
88%
89%
90%
90.4%
90.5%
Data source: Costco. *Excludes fuel sales and foreign exchange rates.
In the first nine months of fiscal 2025, Costco’s adjusted comps rose 8.1% year over year. It ended the third quarter with 905 warehouses, 142.8 million cardholders, and a global renewal rate of 90.2%. In other words, it won’t lose its momentum anytime soon.
Costco remained a top shopping destination during the COVID-19 pandemic as consumers stocked up on essential products. The big spike in inflation from 2021 to 2023 also drove more cost-conscious consumers to its stores. It even raised its membership fees for the first time in seven years last September — but that price hike didn’t throttle its growth over the past year. That pricing power suggests it still has plenty of room to raise its membership fees in the future.
Costco’s gross margin dipped from 11.2% in fiscal 2020 to 10.9% in fiscal 2024. That pressure can be attributed to inflation, intentional limits on its markups, the expansion of its lower-margin e-commerce business, and currency headwinds for its overseas warehouses. However, its earnings per share (EPS) still grew at a compound annual growth rate (CAGR) of 16% as its sales growth outpaced its gross margin compression, it raised its membership fees, and its scale diluted its operating expenses.
From fiscal 2024 to fiscal 2027, analysts expect Costco’s net sales and EPS to grow at a CAGR of 8% and 10%, respectively. That stable growth should be driven by its plans to open 25 to 30 new warehouses per year, its ongoing investments in its e-commerce ecosystem, the expansion of its logistics network, and the stickiness of its ancillary services.
However, Costco’s stock isn’t cheap at 52 times this year’s earnings. At the beginning of calendar 2023, its forward price-to-earnings ratio was only in the low 30s. Therefore, a bit too much growth might be baked into its current valuations.
If Costco matches Wall Street’s estimates, grows its EPS by a CAGR of 10% over the following four years, and trades at a more reasonable 35 times forward earnings by the final year, its stock price could rise 20% to $1,140 by 2030. That would be a decent gain, but it probably won’t come anywhere close to matching its returns from the past five years.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
