Costco’s Resilience Proves Its Ongoing Relevance and Brand Strength

We don’t plan a material change in our $476 fair value estimate for wide-moat Costco COST after digesting fiscal 2023 second-quarter results that came in a touch below our estimates. Its total revenue of $55.3 billion (up 6.5%) and operating margin of 3.4% fell short of our estimates of $55.8 billion and 3.5%, respectively. Nonetheless, we maintain our projections for mid- to high-single-digit annual revenue growth and operating margins around 4% over our 10-year explicit forecast, as our long-term prospects for the business remains intact. With shares trading near our existing intrinsic valuation, we’d suggest investors await a more attractive entry point.

In the quarter, Costco recorded healthy growth in comparable sales (6.8%) and traffic (up 5% worldwide and 3.7% in the U.S.), although there was a pullback in sales of big-ticket discretionary items (down 15%) with ongoing inflationary pressures. In our view, Costco is better able to withstand such a macro backdrop than most large retailers. We contend its ability to deliver value (through its concentrated assortment and procurement strength) and well-differentiated private-label offerings (which saw 1.5% uptick in sales penetration in its food arm) provide a competitive edge and justify our wide-moat rating.

Costco’s membership renewal rates reached 92.6% in the U.S. and Canada (combine for 73% of sales) and 90.5% worldwide, both all-time high marks. In addition, its executive membership penetration (which requires double the standard charge, in exchange for a 2% annual reward and added benefits) reached a zenith (45%) in the quarter, providing us more confidence that Costco’s value proposition should continue to resonate with its shoppers despite additional tariff increases we expect to hit in the back half of its fiscal 2023.