This Washington-Based Company Just Shared Earnings, and Things Are Better Than Expected

Key Points

• Costco edged past estimates on the top and bottom lines in its earnings report.

• The company delivered solid growth in membership income.

• It's adjusting its inventory to weaker discretionary spending.

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Costco Wholesale (NASDAQ: COST) is one of the most dominant retailers in the world, and it continues to outpace its brick-and-mortar peers, quarter in and quarter out.

Costco keeps opening stores around the world, differentiating itself from other retail giants like Walmart and Home Depot, and it's seeing strong growth in e-commerce, showing that there's plenty of untapped demand for the buy-in-bulk, big-box chain.

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Those trends were on display in Costco's fiscal fourth-quarter earnings report, which came out on Thursday, Sept. 25.

Image source: Getty Images.

Revenue rose 8% in the quarter to $86.2 billion, which was slightly ahead of estimates at $86.1 billion. Comparable sales adjusted for foreign currency and fuel prices rose 6.4%, which was ahead of the consensus at 5.9%, though that's still a very strong clip compared to its peers, especially at a time when consumer sentiment is down and the job market is weakening.

On the bottom line, earnings per share jumped 11% to $5.87, which was ahead of the consensus at $5.81.

Among other key numbers, Costco reported a gross margin of 11.13%, up 13 basis points from the quarter a year ago. Membership trends remained strong with membership income up 14%, reflecting a fee increase a year ago, and a 6.3% increase in paid memberships to 81 million.

On the earnings call, Costco touted recent warehouse expansion that has allowed the company to sell more high-priced, discretionary items like furniture and saunas.

It's also increased store hours for executive members, a perk for those who pay double the membership fee, opening the store an hour early for those members. Management said it saw a trend of cardholders upgrading their membership toward the end of quarter, a sign the new perk is paying off.

Like other retailers, Costco is adjusting to new tariffs, and also said it was reducing some discretionary inventory in response to consumers cutting back on spending.

Why Costco stock edged lower

Despite the generally strong earnings report, Costco stock fell modestly on the report, down 0.8% in the after-hours session. Costco is one of the more stable stocks on the market, and it doesn't tend to move much on earnings.

Its results are generally easy to model, and the consistency of its membership income, means its earnings have less variation than they would for the typical retailer.

Costco also doesn't offer guidance, so the company gives investors little clue as to what to expect in the next quarter. That seems to be by design as the business is designed to be stable, and therefore, there's no reason to expect its results to change significantly from quarter to quarter.

The biggest problem for Costco stock at this point is the valuation. Though Costco has pulled back a little bit, it's still about as expensive as it has been at any time in its history.

It now trades at a price-to-earnings ratio of 51.8 after the latest earnings report. That's more expensive than just about any other brick-and-mortar retail stock, and Costco's growth alone doesn't seem to justify such a valuation, which is on par with Nvidia.

However, Costco has earned that premium valuation because of its stability and the resilience of its business model. Its members are very loyal. It finished the year with a 92% renewal rate in North America and a 90% renewal rate worldwide.

While the valuation may be fair, Costco also seems to have reached a valuation ceiling. Further growth in the stock will need to come from earnings growth rather than multiple expansion. That means the breakneck growth seen in recent years is likely over for now.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.