Costco has put up impressive growth in recent years. Can it continue?
If you’re looking for a stock to set and forget, Costco Wholesale (COST -1.65%) is as good a choice as any. The warehouse retailer has been one of the most reliable holdings on the stock market throughout its history, and its competitive advantages are easy to see.
Its membership model locks in customers and provides the company with a consistent revenue stream that goes straight to the bottom line, and people love the brand. Its renewal rates hover around 90%, and its customer satisfaction rates are among the highest in retail. Over the last five years, the stock has tripled, and over the last decade, it’s gained nearly 600%.
It might seem farfetched to suggest that Costco can hit a $1 trillion market capitalization by the end of the decade, but the retailer is worth more than you might think today. After the recent bull run, it now has a market cap of $400 billion, meaning the stock would have to gain 150% by 2030 to reach a $1 trillion valuation, ignoring the effect of share buybacks.
So what would it take for the retailer to get to a $1 trillion market cap? Let’s break it down.
Image source: Costco.
Costco’s recent performance
If Costco repeats its performance of the last five years, it will reach the $1 trillion mark, but tripling again won’t be so easy.
First, a significant part of the stock’s gains over the last five years came from multiple expansion — that is, its price-to-earnings ratio went from 36 to 54, an increase of 50%. That’s an unusually high valuation for a retailer, and investors shouldn’t expect it to continue moving higher. In fact, keeping it at that level could be challenging.
Without multiple expansion, the stock’s gains will have to be driven by earnings growth, so it would have to grow earnings per share (EPS) by roughly 150%, or 16.5% a year. That is achievable, though it may be challenging. In fiscal 2024, which it just reported, Costco saw 17% EPS growth, and it lost a week in the fiscal year.
In order to achieve 17% EPS growth, it reported 5.9% comparable sales growth adjusted for foreign exchange and fuel prices. Revenue for the year was up 5%, which doesn’t adjust for the extra week in fiscal 2023. Membership fees rose 5.4% to $4.8 billion.
However, its gross margin improved by 36 basis points to 10.9%. That can make a big difference for a low-margin company of Costco’s size. It led operating income to expand 14% to $9.3 billion, driving EPS up 17%.
Costco’s growth path
Unlike most large brick-and-mortar retailers, Costco is still opening new stores, and its e-commerce business is growing in the double digits. Along with its consistent same-store sales growth, Costco should be able to deliver revenue in the high single digits, especially with the help of an increase in its membership fee at the start the fiscal year — from $60 to $65 for its base membership.
If net sales increase 8% a year over the next six years, Costco’s net sales will jump from $249.6 billion in fiscal 2024 to $396.1 billion in fiscal 2030. This is assuming the same increase in membership fees gets it to $7.4 billion in membership income. If its gross margin improves to 12%, the company will have gross profit of $47.5 billion, up from $27.3 billion, or a 74% increase.
Costco finished 2024 with a selling, general, and administrative (SG&A) expense margin of 8.9%. If the company can shave that by 50 basis points, it will have an operating income of $20.9 billion by fiscal 2030, up 125% from fiscal 2024, which puts it in range of a $1 trillion market capitalization.
Can Costco get there?
Whether Costco reaches a $1 trillion valuation by 2030 will depend on the global economy as well. The business tends to be recession-proof, as it’s known for low prices, and it makes most of its revenue from staples like groceries.
Given its high price-to-earnings ratio, reaching a $1 trillion valuation by 2030 might be a stretch. However, Costco has the competitive advantages and business model to continue growing, meaning it should get there eventually, if not in six years.
