Costco, Solid Fundamentals... Will Continue Performance Improvement Trend

[Asia Economy Reporter Minji Lee] Costco is expected to show an upward trend in its stock price based on stable performance. However, since the valuation has risen, it is advised to use any stock price corrections as buying opportunities.

On the 19th, Costco's stock price was $547.61, up about 44% since the beginning of the year. The increase in the number of customers and transaction volume has supported solid performance, which is analyzed to be driving the stock price upward.

Costco's Q1 (September to November) sales and EPS exceeded market expectations by 1.6% and 5.8%, respectively. Considering that sales growth surged by 16.7% last year due to the COVID-19 pandemic, Costco is maintaining steady growth despite the base effect. The overall same-store sales growth rate recorded 9.8%, showing a slight increase compared to the previous quarter. By region, the U.S. grew by 9.9%, Canada by 8.3%, and other regions by 10.9%, showing balanced growth. The North American region, which showed strength in the first half of the year, saw a decline in growth rate in the second half due to emerging supply chain issues compared to the first half.

Costco's competitiveness lies in maintaining a smaller number of SKUs compared to competitors. Costco has 3,700 SKUs, which is smaller compared to competitors like Walmart (30,000 to 140,000 SKUs). The sales proportion of the private brand Kirkland Signature is about 32%, higher than the U.S. supermarket average of 19.5%.

Costco continues to increase its membership renewal rate based on differentiated products and excellent price competitiveness. The number of membership households reached 62.5 million, increasing by 800,000 households compared to the previous quarter and up 5.8% year-over-year. Although the growth rate has slowed compared to the COVID-19 pandemic period, it still maintains a higher level than before. Researcher Cheolmin Kim of Samsung Securities said, “The membership renewal rate in North America reached an all-time high of 91.6%, and the global renewal rate also set a record at 89%.”

With the increase in new stores, the total number of stores rose to 828. Nine new stores were opened during Q1, including new stores in France and China in December. The company plans to open a total of 27 new stores in the 2022 fiscal year. Considering U.S. consumer price inflation and Costco's unique competitiveness, the performance improvement is expected to be significant. Costco's price increase guidance for this year is around 4%. As membership customers increase, fee income is expected to grow steadily, with fees accounting for 58% of operating profit.

Researcher Myungjoo Kim of Korea Investment & Securities explained, “Costco has higher last-mile delivery competitiveness compared to competitors, which is one reason for the increase in loyal customers. Costco Logistics specializes in delivering large products, a service not offered by competitors like Walmart and Target.”

Looking at the company's valuation, the price-to-earnings ratio (PER) based on next year's earnings is over 40 times, which is lower than the peak (around 44 times), but its attractiveness is estimated to be low. Researcher Cheolmin Kim said, “It is currently receiving a high premium due to the reflection of COVID-19 tailwinds. However, considering the company's competitiveness from a mid- to long-term perspective, it is necessary to pay attention to it from a long-term viewpoint.”