Over the past six months, Costco’s shares (currently trading at $894.40) have posted a disappointing 10.2% loss, well below the S&P 500’s 12.9% gain. This may have investors wondering how to approach the situation.
Following the drawdown, 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 Positive Attributes:
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 is only so much real estate to build new stores, placing a ceiling on its growth. To expand meaningfully, Costco likely needs to tweak its prices or enter new markets.
One Reason to Be Careful:
Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Costco grew its sales at a mediocre 7.6% compounded annual growth rate. 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 positive characteristics outweigh the negatives. After the recent drawdown, the stock trades at 41.3× forward P/E (or $894.40 per share). Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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