Is Costco's Technology Spending Finally Fueling Better Productivity?

Costco Wholesale Corporation’s COST technology investments are translating into measurable productivity gains. While the company remains committed to its warehouse expansion, it is increasingly leaning on digital tools to sharpen its operations. The goal of these digital initiatives is to improve operational efficiency so that the company can maintain its low-price business model.

The introduction of the Costco Digital Wallet, membership scanning at the door and pre-scanning small-to-medium baskets has already produced notable results. Locations using pre-scanning technology have reported a significant increase in checkout speed. These initiatives have helped the company achieve record levels of checkout productivity in the United States.

Productivity is also being improved through the integration of artificial intelligence into the pharmacy inventory system. This system autonomously reorders products and compares drug pricing across vendors to ensure high in-stock levels. This automation has driven growth in prescriptions and bolstered margins. On its last earnings call, Costco indicated that it is gradually introducing artificial intelligence tools within its gas operations.

Costco is enhancing the online experience with upgraded product pages, improved search, and new personalization that recommends relevant items based on members’ search history. It has also expanded purchasing flexibility through its Buy Now Pay Later program, which is especially helpful for higher-ticket items. Costco's same-day delivery service, powered by Instacart in the United States and Uber Eats and DoorDash internationally, is performing well.

The productivity gains have helped mitigate the financial impact of extending warehouse operating hours. The shift toward a more digitally enabled warehouse model is providing the operational leverage needed to maintain a competitive pricing strategy.

What the Latest Metrics Say About Costco

Costco, which competes with Dollar General Corporation DG and Target Corporation TGT, has seen its shares decline 3.4% over the past year against the industry’s growth of 12%. While shares of Dollar General have surged 117.3%, those of Target have dropped 5.8% in the aforementioned period.
 

From a valuation standpoint, Costco's forward 12-month price-to-earnings ratio stands at 47.73, higher than the industry’s ratio of 33.91. COST carries a Value Score of D. Costco is trading at a premium to Target (forward 12-month P/E of 14.53) and Dollar General (21.73). 
 

The Zacks Consensus Estimate for Costco’s current financial-year sales and earnings per share implies year-over-year growth of 8.1% and 12.5%, respectively. For the next fiscal year, the consensus estimate indicates a 7.3% rise in sales and 9.4% growth in earnings.
 

Costco currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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