Big-box club retailer Costco Wholesale Corp. (NASDAQ:COST) has enjoyed a substantial share price boost in the last year, as both in-person customer traffic and e-commerce sales have flourished. Despite already posting gains of 48.4% in the past 12 months, the warehouse club’s rock-solid base of loyal members, rival-beating pricing practices, and the prospect of an upcoming hike in membership fees all point to further success.
These and other factors may have contributed to Costco’s strong support from analysts across Wall Street, who give the stock an overwhelming Strong Buy rating. I see this bullish view as right in line with the well-being of Costco’s fundamental business operations. Below, we’ll dig a bit deeper to see why Costco shares may be worth considering at this time.
Gains in Both Physical and E-Commerce Businesses
Though perhaps best known for its massive warehouses full of supersized products, Costco also offers a thriving e-commerce business. Both the company’s in-person and online sales have climbed steadily in recent months. Customer traffic overall was up 4% for the most recent quarterly period.
For the second fiscal quarter, which ended in mid-February, in-person sales for U.S. stores climbed by 4.3% year-over-year, while online sales surged by 18.4%. Both Canada and other international sales rose at a faster rate than U.S. in-person sales. All told, net sales for the quarter rose by 5.7% year-over-year.
The company’s momentum has not slowed down since the end of the second quarter. In its March 2024 sales report, Costco announced monthly sales of $23.5 billion, an increase of 9.4% from the same time last year. With 28.3% growth in e-commerce sales for that period, the company’s online business is continuing to lead revenue improvement.
Loyal Members Likely to Accept Fee Hike
Costco operates as a warehouse club, and membership fees represented $1.1 billion in revenue last quarter alone. Like many other subscription-based companies, Costco periodically raises the price of those fees. Typically, the firm has raised prices every five or six years. However, the last time it increased member fees was in 2017, leading many analysts to suspect that a fee hike could be imminent.
When a subscription service raises its fees, it must contend with the likelihood that some members will opt to discontinue their memberships. For Costco, however, customer loyalty is at an exceptionally high rate—the company’s member renewal rate is 92%—and it can reasonably be expected that a significant portion of that member base will be willing to accept an increase in fees in order to continue shopping.
Pricing Strategy Has Weathered the Inflation Storm
Costco sells many of its products in bulk and also provides a host of options in its in-house brand, Kirkland Signature. Both of these factors allow it to be a price leader across the retail space, providing customers a pathway to savings over many rivals. Still, pandemic challenges and inflation over the last several years have made it difficult to keep prices down.
The company took unusual steps to maintain its position as a price leader during this time, including operating its own shipping fleet and acquiring a chicken farm, among other tactics. These strategies have paid off, as Costco has said it effectively saw the impact of inflation disappear as a result.
Investors may watch to see how the company navigates future economic turmoil as it goes through a major executive leadership transition. Richard Galanti, Costco’s CFO for almost four decades, has recently stepped down, leading some to question how the company may shift its strategies, going forward. Still, given its strong reputation among customers, the high value of its in-house brand, and its history of innovative techniques to keep prices down, there is plenty to be optimistic about.
Is COST Stock a Buy, According to Analysts?
Costco shares are trading at close to record highs right now. Still, Wall Street analysts expect upside potential of 7.8% based on COST stock’s average price target of $777.08. The company’s stock enjoys a Strong Buy rating based on 20 Buys, six Holds, and zero Sells.
The Takeaway: Even after a Rally, Growth Potential Remains
Costco’s recent history of exceptional online sales growth and strong in-person revenue gains suggest that it is more than capable of handling any economic turbulence that may come its way. The company’s member base remains highly engaged and loyal, priming the firm for a successful transition to higher member fees. Finally, Costco has a history of outside-of-the-box strategies for keeping prices low relative to competitors that have both boosted the company’s reputation and given it a leg up on sales.
