it's not a secret costco wholesale (Fee 1.11%) is one of the most successful retail businesses. A focus on efficiency and price leadership has allowed the warehouse club giant to build his third-largest retail empire on the planet. walmart and Amazon. Costco achieved this success on a much smaller sales scale, as each of its stores (871 worldwide) averages more than $250 million in annual revenue.
There are other aspects of the company's business that investors should know about before buying shares this year. Here are four of the biggest ones.
1. Costco's sales are accelerating
The main piece of good news that could lift the stock heading into 2024 is Costco's improving growth rate. The company, in contrast to most of its peers, releases monthly sales updates, so investors have a good idea of how the business has performed during the holiday season.
Executives announced in early January that sales in December rose an astonishing 9% year over year, more than double the rate of expansion from the previous quarter.
The acceleration was felt in both Costco's warehouse division and its e-commerce division, which focuses on big-ticket discretionary purchases such as home furnishings and appliances. It's an encouraging trend that suggests shoppers, who held back their spending through much of last year, are feeling more confident.
2. Costco's profitability remains the same
Wall Street is excited about the possibility that Costco will raise its membership fees in 2024. After all, it's been more than six years since the last price increase, and renewal rates are currently at an all-time high. It's clear that shoppers are getting a lot of value from their subscriptions, which is good news for companies that derive most of their profits from membership fees.
But investors shouldn't expect Costco's profit margins to rise along with these fees. Management has made clear over the years that it intends to direct all extra resources toward keeping the chain's product prices low. This is why operating profit margins have remained unchanged at around 3% of sales over the past 10 years. This is also an important factor supporting sales growth.
3. Costco inventory is high.
Costco's stock is not cheap when compared to its peers or compared to historical valuations. Today's stock sales he has to pay 1.2 times, or about twice as much as Walmart. the goal. This large premium also applies to Costco's price-to-earnings ratio. Its stock trades at nearly 50 times earnings, compared to Walmart's 27 times earnings.
Costco tends to receive a premium valuation thanks to factors such as unusually stable sales and profit growth. It is true that profit margins are low, but profit margins do not fluctuate significantly with changes in consumer spending. Investors appreciate that level of predictability, but this doesn't happen often in the retail industry.
4. Costco just drastically reduced its cash holdings.
Costco's reported cash balance will be significantly lower when the company releases its next earnings report in early March. Management may have splurged on a $7 billion one-time dividend that arrived in shareholder accounts in mid-January, reducing its cash holdings to about $10 billion.
Investors should follow this metric in addition to the chain's latest update rate in Costco's next full earnings update. Even though 2024 is a weak year on both counts, continued progress in both areas will mean faster sales growth and more cash returns to shareholders over the long term. To do.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. Demitri Kalogeropoulos has positions at Amazon and Costco Wholesale. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.