2 Reasons to Like COST and 1 to Stay Skeptical

Over the past six months, Costco’s shares (currently trading at $921.09) have posted a disappointing 12.7% loss, well below the S&P 500’s 14.1% gain. This may have investors wondering how to approach the situation.

Given the weaker price action, is this a buying opportunity for COST? Find out in our full research report, it’s free for active Edge members.

Why Does Costco Spark Debate?

Designed to be a one-stop shop for the suburban consumer, Costco (NASDAQ:COST) is a membership-only retail chain that sells groceries, apparel, toys, and household items, often in bulk quantities.

Two Things to Like:

1. Surging Same-Store Sales Show Increasing Demand

Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.

Costco has been one of the most successful retailers over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 5.6%.

2. Economies of Scale Give It Negotiating Leverage with Suppliers

With $275.2 billion in revenue over the past 12 months, Costco is a behemoth in the consumer retail sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices. However, its scale is a double-edged sword because there are only a finite number of places to build new stores, making it harder to find incremental growth. To expand meaningfully, Costco likely needs to tweak its prices or enter new markets.

One Reason to be Careful:

Long-Term Revenue Growth Disappoints

Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Costco’s sales grew at a tepid 6.6% compounded annual growth rate over the last three years. This wasn’t a great result compared to the rest of the consumer retail sector, but there are still things to like about Costco.

Final Judgment

Costco’s positive characteristics outweigh the negatives. With the recent decline, the stock trades at 45.6× forward P/E (or $921.09 per share). Is now the right time to buy? See for yourself in our comprehensive research report, it’s free for active Edge members .

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