Costco hits the mark but valuation remains a concern
1min read Costco reported Q1 EPS of $4.04, surpassing analyst expectations of $3.79, with a 22-cent boost from a one-time tax benefit. Excluding the tax impact, EPS growth of 13% still beat consensus by three cents, supported by solid sales and gross margin performance.
Total revenue was $62.15 billion, slightly ahead of the $62.08 billion forecast, representing a 7.5% year-over-year increase. Net sales grew by 8%, while adjusted comps increased 7.1%. E-commerce comps were particularly strong, up 13.2%, highlighting the resilience of Costco’s online channel amid evolving consumer shopping habits.
Key metrics to watch include U.S. same-store sales, which grew 7.2% excluding gas and FX, above the 6.26% consensus estimate. However, total company comps, including gas and FX, rose 5.2%, missing the 5.66% forecast, reflecting some uneven trends across categories and geographies.
Pharmacy emerged as a major growth driver, supported by industry disruption and Costco’s initiatives to lower prescription and over-the-counter prices. Leveraging technology like prescription management software and partnerships with Instacart, Costco’s pharmacy segment saw robust sales growth, described as the company’s "biggest tailwind."
Costco continues to attract higher-income shoppers, who are driving demand for premium items like wagyu beef, jewelry, and home furnishings. This aligns with a broader consumer trend bifurcating spending toward both high-end and value offerings, where Costco is well-positioned to capture share.
Despite raising membership fees in September, Costco executives noted the financial impact has been minimal so far due to deferred accounting. Most benefits are expected to materialize later in FY25 and into FY26, potentially boosting longer-term revenue growth.
Shares dipped slightly post-earnings, as the stock grappled with mixed sales results despite strong EPS performance. Analysts remain optimistic about Costco’s ability to maintain traffic growth and capture spending across income levels, citing its value-driven business model as a competitive advantage.
Shares are holding around the 10-day moving average. Given the market momentum, we would be surprised if the stock did not test the key $1000 psychological level over the final two weeks of 2024. Valuation remains a concern as the stock is trading at approximately 50x earnings.
In conclusion, Costco's Q1 results showcased strong profitability and resilient demand among its diverse customer base, particularly in pharmacy and high-end products. While certain sales metrics fell short, the company’s continued investments in technology, e-commerce, and consumer engagement position it for sustained growth in a challenging retail environment.
