Over the past six months, Costco’s stock price fell to $916.19. Shareholders have lost 8.9% of their capital, which is disappointing considering the S&P 500 has climbed by 13.6%. This might have investors contemplating their next move.
Given the weaker price action, is now a good time to buy COST? Find out in our full research report, it’s free.
Why Does Costco Spark Debate?
Designed to be a one-stop shop for the suburban consumer, Costco (NASDAQ:COST) is a membership-only retail chain that sells groceries, apparel, toys, and household items, often in bulk quantities.
Two Things to Like:
1. Surging Same-Store Sales Show Increasing Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Costco has been one of the most successful retailers over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 6.6%.
2. Economies of Scale Give It Negotiating Leverage with Suppliers
With $293.6 billion in revenue over the past 12 months, Costco is a behemoth in the consumer retail sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because there are only a finite number of places to build new stores, making it harder to find incremental growth. To accelerate sales, Costco likely needs to optimize its pricing or lean into international expansion.
One Reason to Be Careful:
Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Costco’s 7.6% annualized revenue growth over the last three years was mediocre. This wasn’t a great result compared to the rest of the consumer retail sector, but there are still things to like about Costco.
Final Judgment
Costco’s merits more than compensate for its flaws. After the recent drawdown, the stock trades at 41.9× forward P/E (or $916.19 per share). Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.
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