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Dow Jones NewsJan 9, 5:33 PM UTC
DJ Costco Stock Is Near Record Highs After a Very Merry December. Is There Still Time to Buy? -- Barrons.com
By Sabrina Escobar
Costco Wholesale's December results confirm that the retailer is firing on all cylinders.
The question nagging at investors now is whether the stock -- which has been trading close to record highs -- is worth the lofty price tag.
On Wednesday, Costco reported that its sales in December rose 9.9% from last year, while same-store sales jumped 7.4% from a year prior. Both figures accelerated markedly from November's gains in what Oppenheimer analyst Rupesh Parikh called a "powerful top-line delivery."
Costco's December results got a boost from a shift in the calendar -- Thanksgiving was a week later in 2024, pushing the bulk of holiday shopping activity to the twelfth month. The company noted that the timing shift positively impacted e-commerce sales by about 15 percentage points, and gave total same-store sales a boost of about 1.5 percentage points.
Yet the sales strength wasn't just a calendar quirk, analysts say.
Even after factoring in the timing shift, Costco's sales growth was solid. The growth in e-commerce is particularly noteworthy, given that the company was lapping strong growth from a year ago as people started snapping up Costco's gold bars, notes Greg Melich, an analyst at Evercore.
Plus, foot traffic worldwide increased 5.5% in December compared with 3% in November, and the average transaction size was up 1.8% compared with 0.1% in November. And all of Costco's categories saw positive same-store sales growth, with sales in nonfood categories increasing by a percentage in the high teens, Costco said Wednesday. Better-performing departments included jewelry, gift cards, and seasonal items.
To D.A. Davidson analyst Michael Baker, that suggests there is strong underlying demand for discretionary items -- a plus for Costco. It also means that Costco's recent investments in e-commerce are paying off, he added. Indeed, while Costco has long lagged behind many of its retail peers in its e-commerce capacity, it is now catching up.
"We have, of course, been investing a little bit more in technology as well as we sort of modernize the platforms there and look to build the right capabilities to support growth in the future," said Gary Millerchip, Costco's chief financial officer, at the company's December earnings call with analysts.
Yet despite the encouraging signs, D.A. Davidson's Baker maintained a Neutral rating and $900 price target on the stock, noting that he was waiting for a better entry point. Costco trades hands at 49.4 times forward earnings, nearing its five-year high of 54.8. Baker isn't the only one worried about the valuation -- many other analysts that rate the stock Neutral have echoed similar concerns.
Citi analyst Steven Zaccone, for instance, also has a Neutral rating on the shares. While Costco's premium valuation is justified based on its ability to gain market share and long-term growth potential, the risk/reward "is balanced at this elevated level of valuation," he wrote on a note Wednesday evening.
That said, the stock's performance over the past year has tended to favor the bulls, gaining close to 40% in the past 12 months. Optimistic investors see more upside ahead.
Evercore ISI analyst Greg Melich acknowledges that the stock isn't cheap. Yet he believes the company is well positioned to maintain and expand its premium valuation this year. He rates the stock Outperform with a $1,030 price target.
"Costco's loyalty driven model and pricing power should help navigate any political regime/ U.S. retail landscape," Melich wrote. "COST/AMZN/WMT -- aka 'The Big Three' will likely gobble 60%+ of U.S. retail growth this year, so we see Costco's elite share gain as likely to sustain outperformance."
Most of the Street sides with Melich, with 58% of analysts rating Costco stock a Buy, 37% a Hold, and 5% Sell, according to FactSet.
"Our Buy rating on COST shares reflects its status as a best-in-class retailer, underpinned by its strong value proposition to consumers, which we expect to result in continued outperformance versus peers and market share gains," wrote Stifel analyst Mark Astrachan, who has a Buy rating an a $1,000 price target on the shares.
Markets were closed on Thursday in observance of a national day of mourning in honor of former President Jimmy Carter, who died in late December. Costco shares had ticked up just under 2% in after-hour trading Wednesday.
Write to Sabrina Escobar at sabrina.escobar@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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January 09, 2025 12:33 ET (17:33 GMT)
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