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Here are the next drivers of Costco growth after a great quarter and a stock near records

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7 months ago

May 31, 2024

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Here are the next drivers of Costco growth after a great quarter and a stock near records

Costco has multiple levers of growth at its disposal, which should lead to a further boost in the stock even after its already impressive year-to-date gains. Shares dropped more than 2% on Friday despite the warehouse retailer’s after-the-bell quarterly beats on earnings and revenue. The stock closed Thursday’s regular session at a record high of just over $815. In 2024, Costco has gained 20% — more than double the S & P 500 ‘s advance and well above the 6% increase in the consumer staples sector over the same stretch. “If you’re disappointed, go to another stock,” Jim Cramer said during Friday’s Investing Club’s Morning Meeting . Jim said investors should not be concerned about the pullback because the stock often drops the day after earnings. “There’s nothing wrong with Costco whatsoever. It was a perfect quarter.” COST 1Y mountain COST 1-year stock performance. In addition to exceeding estimates on the top and bottom lines in its fiscal 2024 third quarter, Costco turned in a better-than-expected 6.5% comparable sales increase. Gross margins of 10.84% slightly missed the mark but still increased 52 basis points, or 0.52 percentage points, on a reported basis and 54 basis points excluding gas inflation. An area of growth discussed on the post-earnings conference call was e-commerce business. CEO Ron Vachris and CFO Gary Millerchip — both new to their respective positions — highlighted the need to invest in technology and alternative revenue streams, including digital advertising to monetize online traffic like Amazon and Walmart have done. Millerchip was CFO at Kroger before joining Costco in March. Vachris, who has spent the past 40 years in various roles at Costco, assumed the CEO post in January. In fiscal Q3, e-commerce sales grew 20.7% year-over-year driven by appliances, precious metals like gold and silver, and gift cards. This strength shows “COST is taking share in these areas online due to increased marketing and improved delivery with their Costco Logistics integration,” D.A. Davidson said in a research note Thursday. Warehouse store expansion in the U.S. and international markets is another growth opportunity for Costco. For the rest of fiscal year 2024, management said they plan to open 12 new locations – nine in the U.S., two in Japan, and one in Korea. Altogether that would be 28 new locations this fiscal year. Millerchip said he anticipates, somewhere between 25 to 30 new warehouses per year long-term. Store traffic during the quarter grew both globally and in the U.S. — up 6.1% and 5.5%, respectively. That was stronger than growth in the prior quarter. Redburn said in a Friday note that new warehouse growth internationally is where most of Costco’s markets are “still meaningfully underpenetrated” and added the strength of existing warehouses is “the main driver of membership growth.” Back in January, as longtime CFO Rich Galanti was getting ready to retire, he said that China holds “very good potential” for Costco. Another major catalyst Wall Street and investors like us are anticipating is a Costco membership fee increase. Even though we didn’t get an update on the potential for a fee increase this quarter, it’s still on the table, and we think it’s a matter of when, not if that will happen. A membership fee hike is historically overdue, but the company has said it does not want to exacerbate the elevated inflation environment by saddling customers with higher costs. Following the Costco earnings, we increased our price target on the stock to $875 per share from $800, while maintaining our 2 rating — meaning we view further pullbacks as buying opportunities. (Jim Cramer’s Charitable Trust is long COST, AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A general view of a Costco Wholesale at Lakeside Retail Park on February 5, 2024 in Grays, United Kingdom.

John Keeble | Getty Images

Costco has multiple levers of growth at its disposal, which should lead to a further boost in the stock even after its already impressive year-to-date gains.

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Here are the next drivers of Costco growth after a great quarter and a stock near records

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Here are the next drivers of Costco growth after a great quarter and a stock near records

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