Wholesale Costco at Luxury Valuations

Ddespite a high concentration in coastal markets and only 817 stores worldwide (565 in the US) compared to Walmart (WMT) 10,500 locations worldwide, Costco (COST) became the third largest retailer in the world in terms of sales. Costco’s $ 195 billion revenue last year put it behind just Walmart and Amazon (AMZN).

The number of members reaches almost 62 million with a renewal rate of 91.3%. Membership dues revenue is $ 3.9 billion and with an operating margin of nearly 100%, which is more than half of the company’s total operating revenue.

The old business model was that Costco only charged retail prices that were 15% above its own costs, no more and no less (with the exception of roast chicken). I doubt this legendary business model will ever hold true with nearly $ 200 billion in sales and operations in 11 countries, but it’s a wonderful, historic business story nonetheless.

While this is one of the biggest success stories in US corporate history with strong growth ahead of it, I am bearish on COST stock because valuation multiples are not sustainable. (See Best Stocks from Analysts on TipRanks)

Same results in store

Costco has historically implemented a long roadmap positive same-store sales or organic growth per store.

  • FY 8/21 14.8% (13.6% excluding volatile exchange rates and gas prices)
  • FY 8/20 8.1% (9.2% excluding F / X and gas)
  • FY 8/19 7.8% (6.4% excluding F / X and gasoline)
  • FY 8/18 9.4% (7.4% excluding F / X and gasoline)

These remarkable results, which represent more than double the rate of GDP growth, have continued in recent months. For the month of September 2021, the same-store sales growth was 14.6% (10% excluding F / X and gasoline) for the month of October, the growth was 15.6% (10, 7% excluding F / X and gasoline).

Inflation is reflected in those sales numbers of course, and yes, trillions in federal government cash and economic stimulus make a difference for major retailers in the United States, but the long-term growth track record of Costco are always impressive.

E-commerce efforts

Costco has had a late bloom when it comes to online sales, but in recent years it has stepped up its efforts to become a major player in online retail. E-commerce sales for Fiscal 2021 increased by 44.4%.

Much of that increase can be attributed to the COVID-19 pandemic, home stay or work-from-home retail orders, with the company’s fiscal year going way back into the 2020 calendar year. October’s latest monthly sales tally showed 16.5% growth for the e-commerce segment.

Currently, online sales make up around 8-9% of total revenue, as the beloved tradition of lugging three large jars of mustard and a 36-roll pack of toilet paper in a squeaky cart will not go away in the future. predictable.

Costco is investing to expand its e-commerce operations. In May 2020, Costco acquired Innovel Solutions, a mid and final mile delivery and installation company. The company was later renamed Costco Logistics. Advanced delivery services and logistics offerings were a big step forward for Costco’s e-commerce division.

Balance sheet, Dividend

As you might expect, Costco maintains a strong balance sheet. Cash balances and short-term investments stood at $ 12.2 billion as of August 31, with total debt of only $ 7.5 billion. Fully amortized property, plant and equipment amounted to $ 23.5 billion.

Costco’s annual dividend pays $ 3.16 yet only earns 0.6% due to Costco’s inflated share price. The compound annual growth rate of the dividend since 2004 is 13%.

Evaluation

COST action is rated for perfection. Investors who stayed away from the company’s high P / E multiple lost substantial gains as the multiple continued to grow.

At 43.5 times forecast EPS estimates of $ 12.20, we are in no land. The only way for the valuation multiple to be sustainable is for double-digit same-store sales growth to continue over the next 10 years. Government stimulus measures are mostly carried out and inflation will subside at some point, so current growth rates are not sustainable in the long run.

The Taking of Wall Street

When it comes to Wall Street, COST has a strong buy consensus rating based on 18 buy ratings and five keep ratings given in the past three months. At $ 523.50, the average COST price target implies downside potential of 1.1%.

Disclosure: Disclosure: At the time of publication, Tom Kerr does not own any shares of the above mentioned stocks.

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