Even Buffett Admitted Mistake in Selling: How Costco's Share Price Soared for Over Two Decades
Costco's stock price has surged by 32.3% this year, from $653.56 to $870.75, outperforming both the S&P 500 and S&P Retail Select Industry Index, which gained 15.0% and 4.9% respectively. If we look back over the past 20 years, Costco's stock price has skyrocketed more than 32 times!![]()
After Warren Buffett selling $1.3 billion worth of Costco stock in Q3 of 2020, Costco's stock price continued to soar. Later, Buffett admitted that selling Costco was a mistake at the 2021 Berkshire Hathaway shareholder meeting.
Besides Buffett, other prominent funds such as Bridgewater and NWQ Managers have also shown interest in $Costco(COST.US$, placing the company among their top 10 holdings in 2021 Q1.
So, what's behind Costco's impressive performance in the US stock market for the past two decades?![]()
1.Industry Leader in Warehouse Membership Stores with Over 60% Market Share
Costco is the top player in the warehouse retail industry and ranks as the world's third-largest retailer, trailing only Walmart and Amazon. With over 40 years of development and consolidation in the US warehouse membership store industry, Costco, Sam's Club, and $BJ's Wholesale Club Holdings(BJ.US$ are the main participants. According to Morningstar, Costco has a market share of over 60% in the US Warehouse Membership Stores, demonstrating its dominance in the industry.
Over the past 20 years, Costco has demonstrated steady performance, with a revenue CAGR of 8.9% and a net profit CAGR of 10.4% from FY2005-2023. The latest quarter's performance of the company remains impressive. In FY2024 Q3, the company achieved revenue of $58.52 billion, representing a YoY increase of 9.1%, and a net profit of $1.68 billion, which grew by 29.1% YoY.
2.Continued Global Expansion and Membership Growth Drive Steady Profit Increase
Costco's revenue is divided into two parts: sales and membership fees.
1) Sales growth is mainly driven by the expansion of store numbers and same-store sales growth.
Firstly, the increase in store numbers has contributed significantly to sales growth. From FY2005 to FY2023, Costco's global store count had a CAGR of 3.4%. As of FY2024Q3, the company operates a total of 876 stores worldwide, including 604 stores in the US (including Puerto Rico), 108 stores in Canada, and 164 stores in other regions. The company is expected to accelerate its expansion pace in FY2024, with 30 new stores planned to open throughout the year. Overseas expansion will be a key focus for Costco's future growth (8-10 new overseas stores were opened each year from FY2021 to FY2023). Compared to Sam's Club and BJ's, Costco has some advantages in overseas expansion. However, compared to retail brands such as $Walmart(WMT.US$ and $CARREFOUR S DRC(CRRFY.US$, which have already achieved global coverage, there is still a lot of room for Costco to grow overseas.
Secondly, same-store sales growth (SSS) has also contributed significantly to sales growth. From FY2005 to FY2023, Costco's SSS CAGR was 6.48%, reflecting the company's strong operating and management capabilities. Costco is able to continuously optimize and improve its sales strategies and adapt to market changes, which has helped to drive this growth.
2) Membership fees contribute 60-70% of Costco's net profit.
Unlike traditional retail giants, which mainly earn profits through the purchase and sale price difference of goods, Costco's membership fees contribute most of its profit, accounting for 60-70%. Costco has a wide range of members worldwide, with a total of 134 million cardholders as of May 2024, representing a YoY growth of 7.3%. Among them, 74.5 million are paid members, representing a YoY growth of 7.8%.
Costco offers four different membership models, with annual fees ranging from $60 to $120. Although Costco's membership fees are slightly higher than those of Sam's Club and BJ's Club, its members still maintain extremely high loyalty. As of May 2024, the company's global renewal rate exceeds 90%, with renewal rates in the US and Canada reaching 93%. Since 2006, membership fees have been raised by about 10% every 5 years, but since 2017, there has been no increase in membership fees. During FY24Q3 earnings call, the company's management stated: "it continues to be talked about as it's something that is still a case of when we increase the fee rather than if we increase the fee." The adjustment of membership fees has always been a concern of the market, and with the management signaling during the earnings call, a potential increase in membership fees may be a catalyst for the next phase of the market trend.
3.Rapid Growth in E-commerce Business
Costco's e-commerce business mainly focuses on selling non-essential items such as household goods, gold bars, jewelry, and consumer electronics. During the pandemic, consumers' online shopping habits were further developed, leading to the rapid growth of Costco's e-commerce business, achieving a CAGR of 31% from FY2020 to FY2022. However, in 2023, due to the impact of inflation, consumers spent less on non-essential items, resulting in poor performance for Costco's e-commerce business. This year, discretionary spending appears to have rebounded, with e-commerce revenue in FY2024 Q3 increasing by 20.7% and app downloads increasing by 32%, mainly driven by the sales of large items such as home appliances, gold and silver bullion, and other big-ticket items. This suggests that Costco may experience higher customer traffic and average transaction value in 2024.
4.High Efficiency Despite Low Gross Margins Results in High ROE
Costco's gross margin is lower than other traditional retail leaders, mainly due to the company's restriction on gross margins of terminal products to improve the cost-effectiveness of goods. However, Costco achieves high sales volume and rapid inventory turnover with prices lower than most other retailers, thereby achieving operating efficiency and profitability. Costco's expense ratio has remained below 10%, significantly lower than peers' 20-25%. The company's total asset turnover ratio has been around 3.5 in recent years, significantly higher than the industry average of 2.5-3. With significantly lower expense ratios than peers and high asset turnover ratios, the company's ROE has been relatively stable in recent years, at the industry average of 25-30%.
5.Highly Praised by Wall Street with Consistently Increasing Average Target Price
This year, the optimistic sentiment surrounding economic recovery, corporate profit improvement, and the end of the Fed's tightening cycle has driven the S&P 500 index up by more than 15.4%, while the S&P 500 equal-weight index has only risen by 4.2%, reflecting the high concentration of large technology stocks leading the market under the AI boom.
Given the current market conditions, institutional investors have favored Costco as a reliable choice for both growth and stability, thanks to its consistent performance. Costco's current PE ratio is 53.5, which represents a significant premium compared to the industry average of 32.2.The mean target price provided by Wall Street investment banks has consistently risen to $851, with the highest target price reaching an impressive $940.
On June 6th, JP Morgan raised Costco's target stock price from $804 to $925 while maintaining an overweight rating. According to JP Morgan analyst Christopher Horvers, "We are reiterating our belief that COST remains a core holding given that its unrivaled value proposition to its fiercely loyal customer base and global growth opportunity are a rare combination in retail and consumer staples."
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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