Costco Thrives Amid Retail Challenges: Is It a Buy?

Costco (NASDAQ: COST) is currently thriving in a challenging retail environment. The company boasts impressive sales and earnings, largely due to its advantageous business model. However, this raises the question: Is now a good time to invest in Costco’s stock?

Understanding Costco’s Business Model

Before diving into Costco’s financials, it’s crucial to grasp its business structure. While Costco operates as a retailer, it specifically functions as a club store, requiring customers to pay a membership fee to shop at its locations. This membership aspect significantly alters the company’s dynamics.

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In the fiscal first quarter of 2025, Costco reported around $2.2 billion in operating income. Approximately $1.2 billion of that came from membership fees, which have minimal associated costs. Consequently, a significant portion—over half—of Costco’s operating income stems from these fees.

Maintaining member satisfaction is paramount for Costco, as these fees provide a consistent income stream. With a renewal rate exceeding 90%, the company evidently excels at this. Costco’s strategy includes offering quality products at competitive prices, bolstered by revenue from membership fees that allow for aggressive pricing strategies. The company, boasting a market capitalization of over $460 billion, also benefits from negotiating power with its suppliers.

Costco’s Robust Performance

The first fiscal quarter illustrates Costco’s effective operational model. The company experienced a top-line growth of 7.5%, with same-store sales climbing 5.2%. Earnings per share stood at $4.04, up from $3.58 in the same quarter last year. A notable increase in store traffic, with a rise of 5.1%, indicates that Costco members are returning to spend more.

Despite its strong performance, a challenge persists for potential investors. As noted by renowned value investor Benjamin Graham, even a solid company can be a poor investment if its price is too high. Wall Street perceptions align with Costco’s strong current performance.

COST data by YCharts

Costco’s trading position is notable, as its stock price hovers within 5% of all-time highs. This trend has pushed the dividend yield toward the lower end of its historical range, suggesting an expensive valuation. Additionally, traditional metrics such as price-to-sales and price-to-earnings ratios are significantly above their five-year averages, highlighting an elevated price for the stock. Historical trends reveal that these ratios are near the highest levels recorded in the company’s timeline.

COST PS Ratio data by YCharts

In conclusion, Costco’s valuation indicates a historic premium. While the company is well-managed, current pricing makes it a less attractive stock option.

Patience Might Be Key with Costco

It’s essential to note that just because Costco’s stock is expensive today doesn’t mean it will remain so indefinitely. The stock has previously seen corrections exceeding 40%, suggesting the possibility of future price declines that may create buying opportunities. For now, investors might consider placing Costco on their watch list rather than investing immediately.

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*Stock Advisor returns as of March 3, 2025

Reuben Gregg Brewer holds no positions in any of the mentioned stocks. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool maintains a disclosure policy.

The views expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.