Costco’s Earnings Beat, But Slowing Sales Raise Concerns: Analysis of Its Growth and Investor Outlook

Costco Wholesale Corporation (COST) recently reported its fiscal fourth-quarter and full-year 2024 earnings. While the company exceeded earnings expectations, it fell short on revenue, indicating a slowdown in growth. This report delves into the key metrics, including net income, revenue, e-commerce sales, and same-store sales, and examines the impact of the recent membership fee increase. Additionally, it explores investor sentiment and future growth prospects, providing a comprehensive analysis of Costco’s current financial health and strategic direction.

Introduction

Financial Performance Overview

Earnings and Revenue

In the fiscal fourth quarter of 2024, Costco reported a net income of $2.35 billion, or $5.29 per share, representing a 7% year-over-year increase. This figure surpassed analyst expectations, which had projected earnings per share (EPS) of $5.08. However, the company’s revenue rose by only 1% year-over-year to $79.7 billion, slightly missing the consensus estimate of $79.93 billion.

For the full fiscal year, Costco’s total net sales reached $249.6 billion, a 5% increase from the previous year’s $237.7 billion. Net income for the year was $7.367 billion, or $16.56 per diluted share, up from $6.292 billion, or $14.16 per diluted share, in fiscal 2023.

E-commerce Sales

Costco’s e-commerce sales grew by 18.9% year-over-year in the fourth quarter, a notable achievement but a slowdown compared to the over 20% growth rate in the previous quarter. When excluding the impacts of gasoline prices and foreign exchange rates, e-commerce sales surged by 19.5%. This growth underscores Costco’s effective digital strategy and its ability to meet evolving consumer shopping preferences.

Same-store Sales

Same-store sales, a critical metric for retail performance, increased by 5.3% in the U.S. and 5.5% in Canada during the fourth quarter. However, these figures also reflect a deceleration compared to prior quarters. For the full fiscal year, comparable sales in the U.S. grew by 4.5%, while international markets reported growth rates of 5.7% for the fourth quarter and 8.1% for the year.

Impact of Membership Fee Increase

Fee Structure and Implementation

Costco raised its membership fees for the first time in seven years, effective September 1, 2024. The annual fee for U.S. and Canada Gold Star individual members, Business members, and Business add-on members increased by $5 to $65, while Executive Memberships saw a $10 increase to $130. This change affects approximately 52 million memberships, with over 50% being Executive members.

Investor Concerns and Potential Impact

Investors are closely monitoring how these higher fees might affect future earnings. While the fee increase did not impact the latest results, it is expected to significantly boost revenue later in fiscal 2025 and into 2026. Membership fee income for the fourth quarter was $1.512 billion, slightly below expectations, but reached $4.828 billion for the full year.

The fee increase is intended to help offset operational costs while maintaining low prices for members. Additionally, the cap on the Executive Membership 2% Reward rose from $1,000 to $1,250 per year. This strategic move aims to enhance member value and support operational costs, which may positively influence overall sales.

Operational Metrics and Cash Flow

Warehouse Expansion

Costco operates 891 warehouses globally, including 614 in the U.S. and Puerto Rico. In fiscal 2024, the company opened 29 net new locations and plans to add another 26 in fiscal 2025, with 12 outside the U.S. This expansion strategy is expected to drive future growth and enhance Costco’s market presence.

Cash Flow and Equity

Costco’s cash and cash equivalents at year-end stood at $9.906 billion, down from $13.700 billion the previous year. Net cash provided by operating activities was $11.339 billion. Total equity as of September 1, 2024, was $23.622 billion, down from $25.058 billion the previous year. The report noted a net non-recurring tax benefit of $63 million related to a transfer pricing settlement that affected earnings.

Investor Sentiment and Stock Performance

Stock Price and Analyst Revisions

Following the earnings report, Costco shares declined about 1% to $892.55 in extended trading. Despite the revenue miss, investor sentiment appears positive, as evidenced by the stock’s performance. Costco’s stock price closed at $901.79, reflecting a 6.09% increase over the last three months and a significant 63.66% rise over the past year. The report also indicated that Costco had 10 positive and 2 negative EPS revisions in the last 90 days.

Price Target and Future Growth Prospects

Analysts have raised Costco’s price target to $950 per share, up from $875, reflecting confidence in continued growth driven by membership fee increases, store expansions, and strong operational fundamentals. The forecast for 2024 indicates a low price of $876.68, an average price of $964.35, and a high price of $1,157.22.

Key drivers for this growth include:

• E-commerce Expansion: Costco is focusing on enhancing its e-commerce capabilities and mobile app functionality, which is anticipated to drive sales growth.
• Competitive Pricing: The company’s commitment to maintaining competitive prices while offering high-quality products is expected to attract and retain customers.
• Market Resilience: Costco’s ability to adapt to challenging economic conditions and evolving consumer behaviors provides a robust foundation for stock appreciation.

Conclusion

Costco’s fiscal fourth-quarter and full-year 2024 earnings report presents a mixed picture. While the company exceeded earnings expectations, it fell short on revenue, indicating a slowdown in growth. The recent membership fee increase, which did not impact the latest results, is expected to significantly boost revenue in the coming fiscal years. Costco’s strategic focus on e-commerce expansion, competitive pricing, and market resilience positions the company for continued success in the retail market.

Investors and analysts remain optimistic about Costco’s future growth prospects, as evidenced by the raised price targets and positive stock performance. However, the company must navigate potential challenges, including economic conditions, competition, and regulatory impacts, to sustain its growth trajectory. Overall, Costco’s strong operational fundamentals and strategic initiatives provide a solid foundation for long-term success.