Costco on Thursday evening reported a strong quarter, beating both its top and bottom lines. The Warehouse Club is clearly taking share from other retailers because of its focus on freshness, quality and value. With gross margins and paid memberships rising, this rally could continue to new highs. Total revenue in the first quarter of fiscal 2025 was $62.15 billion, beating analysts' expectations of $62.08 billion, according to estimates compiled by LSEG. Earnings per share during the period increased nearly 13% year over year to $4.04, beating analysts' expectations of $3.79, LSEG data showed. Earnings per share included a benefit of 22 cents per share related to stock-based compensation. But even after removing the feature, the end results were still better than expected. Costco Why we own it: Costco is the best-run retailer in the world, with a business model focused on offering its members a relatively small selection of products at prices that are hard to beat. Costco has been successful for decades, but high inflation in recent years has made the company's value-focused ethos really shine. Competitors: BJ's Wholesale, Walmart, and Club mate that carries Amazon Last Purchased: June 15, 2020 Start Date: January 27, 2020 The Bottom Line Costco shares fell slightly in extended trading Thursday. But that's how a stock typically trades in reaction to earnings. Since the company reports sales every month, much of the upside has already been priced in. However, negative reactions to earnings were not a negative driver of sentiment. The stock achieved a closing high on Wednesday of $994.69 and is up nearly 50% year to date. Costco shares aren't cheap by conventional standards, trading at about 54 times earnings per share estimates over the next 12 months. However, the lofty valuation hasn't stopped the stock's explosive rise over the years. The stock is worth its hefty premium because of the company's stock gains and reliability through its subscription model. Costco YTD Mount Costco YTD We also liked hearing that Costco completed its first targeted media campaign this quarter. The company recognizes that retail media represents a significant opportunity to generate advertising revenue and increase profits. Walmart and Club name Amazon have proven that e-commerce ad revenue can be big business. As always, we expect these profits to be reinvested into Costco back into the business to create more value for shoppers. This, in turn, will lead to more stock gains in the future. We believe Costco stock can continue to operate in this market, as the company increases the size of its warehouses, gains new members, and expands gross margins. With all three delivered this quarter, we increase our price target to $1,100 per share from $950. This represents an increase of more than 11% from Thursday's close. Comment Total comparable sales increased 5.2% in the quarter, driven by a 5.1% increase in traffic, or repeat shopping, and a 0.1% increase in tickets. Traffic gains tell us that more customers are shopping at Costco warehouses more often. This does not come as a surprise to us. Costco is a big winner in the retail world. But what the small increase in tickets shows is that they excel at cutting costs. Of course, it's one of Costco's advantages to be the first to lower prices wherever and whenever possible. Some examples of recent price cuts include Kirkland Signature Organic Peanut Butter, Kirkland Signature Chicken Broth, and Kirkland Sauvignon Blanc. Costco improved its gross margin by 25 basis points year over year and 7 basis points, excluding gas inflation, to approximately 11.3%. That was a beat against the consensus estimate of 11.15%. The price of gasoline is out of Costco's control, so we prefer to analyze its results excluding its impact to get a picture of the quarter. Core merchandise was the largest driver of gross margin improvement. It rose 17 basis points year over year, driven by mix and the credit card co-branding program. Fresh food and non-food sales increased in sales by high single digits on a percentage basis, the company said. Some of the non-food categories that outperformed were gold gift cards and jewelry, home furnishings, sporting goods, health and beauty aids, luggage, kiosks, and hardware. All were above double digits in sales. Costco's ancillary and other businesses, which include pharmacy, food courts and travel, represent a 16 basis point headwind to gross margin due to gas, partially offset by improved e-commerce margin. The company's 2% rewards program earned a benefit of 6 basis points on an annual basis. This quarter, Costco's membership renewal rate in the U.S. and Canada reached 92.9%, significantly lower than the 92.8% rate observed in the previous quarter. Membership renewals globally saw a similar dynamic, falling to 90.4%. Management attributed this slight decrease to an increase in digital subscriptions, which tend to renew at a lower rate. They expect this to have a continuing impact on published renewal rates for the remainder of the financial year. However, the number of paid memberships continues to rise. It increased more than 7% year over year to 77.4 million, higher than the consensus forecast of 77.2 million shown by FactSet. Keep in mind that the recent increase in membership fees — Costco's first in seven years — has not impacted fee income yet due to deferred accounting effects. Management estimated that the fee increase represented less than 1% of fee growth in the quarter. Costco's warehouse expansion led to six net new locations in the quarter. Four of them were outside the United States. Management expects to add another 26 net new buildings in fiscal year 2025, of which 10 will be outside the United States. 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Customers shop for groceries at a Costco store on December 11, 2024 in Novato, California.
Justin Sullivan | Getty Images
Costco Thursday evening reported a strong quarter, beating both the top and bottom lines. The Warehouse Club is clearly taking share from other retailers because of its focus on freshness, quality and value. With gross margins and paid memberships rising, this rally could continue to new highs.
