Costco shares' sizable gains since this time last year are justified, and there's reason to expect more of the same.
Trading at record highs thanks to its 60% rally over the course of the past 12 months,Costco Wholesale (COST -1.64%) stock could be a bit intimidating. It feels like a pullback could be in the offing. And, maybe that's exactly what's in the cards.
Perhaps the bigger risk here, however, is at the other end of the continuum. That is, waiting any longer to buy into this red-hot name could prove costly by virtue of missing out on more upside. This stock's got a long history of tacking even more gains onto its past gains, after all.
In fact, there are four specific reasons Costco stock could readily continue its current rally.
1. Costco's business model works
Beginning with the obvious, Costco's business model clearly works.
Costco Wholesale is a club-based retailer. With just a passing glance it looks a lot like Walmart (NYSE: WMT), Kroger (NYSE: KR), or Target (NYSE: TGT). There are key differences between Costco and most similar retailers though. That is, shopping at a Costco store requires a paid membership to the "club." The company also sells more of its goods in bulk quantities as a means of offering value.
Given that Costco has been the company it is today since the 1990s, one might think consumers would eventually become weary of paying a retailer just for the right to shop at its stores. You might also expect that company's competitors to counter with something comparable. And for the record, Walmart has; the nation's nearly 600 Sam's Club warehouses are actually owned and operated by Walmart.
Costco's value proposition still clicks with consumers though. Despite occasionally increasing its annual fees -- memberships now start at $60 per year and quickly escalate for more perks -- as of early May the company boasts a record-breaking 74.5 million paid memberships, up nearly 8% from the year-ago count. Underscoring this strength is the annual worldwide membership renewal rate of 90.5%, and an even better renewal rate of 93% within the all-important United States/Canadian market. That's impressive.
2. E-commerce is a huge growth opportunity
Even when nearly all other retailers were wading waist-deep into e-commerce several years ago, Costco opted to keep its focus on drawing people to its stores. Then the COVID-19 pandemic took hold, forcing the company to step up its online game. And it successfully did so.
The retailer's still only scratched the surface of its e-commerce opportunity, however. Less than 5% of its total top line is believed to be generated online, versus more than 10% for Walmart, and even more than that for Target. Just by virtue of catching up with its competitors' e-commerce operations, Costco should be able to accelerate its current overall growth.
And Costco's doing exactly that. Last month's online sales were up 15.3% year over year versus Costco's companywide sales growth of 6.4%. That improvement follows April's 14.6% increase in its online sales when overall revenue only grew 5.6%. In March, the retailer's e-commerce business grew a hefty 28.3% versus the companywide increase of 7.7%.
Connect the dots. Costco is starting to take its online presence very seriously, opening up new opportunities for growth.
3. Costco is looking beyond consumer staples
Costco's roots are largely in the grocery business, which lends itself to selling in bulk. The retailer's slowly drifted deeper into other categories even since its earliest days though. Clothing, electronics, appliances, and other big-ticket items have been part of its inventory mix for years as well.
The company may be taking its exposure to the discretionary sliver of the retailing world to the next level, however.
That's the takeaway from its most recent quarterly report, anyway. As CFO Gary Millerchip made a point of pointing out during last month's earnings call: "As inflation has leveled off, our members are returning to purchasing more discretionary items. And growth in the category was led by toys, tires, lawn and garden, and health and beauty aids."
The warehouse retailer's expanding its inventory selection in well-thought-out ways, too. For instance, leveraging the existing appeal of its own in-house brand, Kirkland Signature, Costco recently introduced KS walking shoes and KS makeup removing towelettes. You may also recall the company recently found smashing success selling gold bars.
It wouldn't be accurate to compare Costco to Target, Walmart, or Kroger just yet. The retailer still appears to understand its edge largely lies in the ways it's different than its more conventional competition. The company does appear to be successfully testing merchandise beyond its usual assortment, however, widening its appeal.
4. There's also room for store/footprint expansion
Last but not least, although it's been building stores for a long time now, it's not like Costco's running out of places and reasons to build new ones.
As of the latest count, Costco operates nearly 880 stores, most of which are found in North America. That's a lot.
But maybe it isn't. For perspective, in addition to nearly 600 Sam's Club Warehouses, there are over 4,600 Walmart stores in the United States alone plus Target's nearly 2,000 U.S. locales. The United States is home to nearly 2,800 Kroger or Kroger-owned grocery stores. Now that's a lot.
It's so many stores, in fact, it might leave interested investors wondering if Costco can successfully add to its existing footprint. It's a particular concern in light of the fact that Walmart, Kroger, and now Target all offer some sort of subscription-based/members-only shopping experience that just might pry a paying customer away from Costco.
The fact is, however, Costco is arguably as complementary to Walmart as it is a competitor to it.
Although the nation may not need 4,600 Costco stores, the 600 Costcos currently located within the U.S. are doing just fine despite the fact that most (if not all) of them are in close proximity to a Walmart and/or a Target store. Last quarter's same-store sales in the U.S. were up 6%. Companywide, they were 6.5%, extending and accelerating a growth streak. This growth was also markedly better than Walmart's U.S. same-store sales growth of 3.8% for the same time frame.
Given the persistent growth of its same-store sales, the 29 stores Costco expects to build during the fiscal year ending in early August is only an illustration of the sort of store growth that likely awaits.
James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Target, and Walmart. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.
