Costco quarter signals record stock run is not done yet. Here’s our new price target

Costco on Thursday evening reported a solid quarter, beating on both the top and bottom lines. The warehouse club is clearly taking share from other retailers due to its focus on newness, quality, and value. With gross margins and paid memberships trending higher, this rally to fresh highs can continue. Total revenue in its first quarter of fiscal year 2025 totaled $62.15 billion, beating analysts’ expectations of $62.08 billion, according to estimates compiled by LSEG. Earnings per share in the period increased nearly 13% year over year to $4.04, topping analysts’ forecasts of $3.79, LSEG data showed. EPS included a 22-cent per share benefit related to stock-based compensation. But even after removing the benefit, the bottom-line 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 universe of products at hard-to-beat prices. Costco has succeeded for decades, but the high inflation of recent years has made the company’s value-focused ethos really shine. Competitors: BJ’s Wholesale , Walmart , fellow Club holding Amazon Last buy: June 15, 2020 Initiation date: Jan. 27, 2020 Bottom line Shares of Costco edged slightly lower in extended trading Thursday. But that’s how the stock usually trades in reaction to earnings. Since the company reports sales every month, a lot of the upside already gets priced in. Down reactions to earnings haven’t been a negative driver of sentiment, though. The stock made a closing high Wednesday of $994.69 and is up nearly 50% year to date. Costco shares are not cheap by traditional standards, trading at around 54 times next-12-months EPS estimates. The lofty valuation, however, hasn’t stopped the stock’s monstrous rise over the years. The stock is deserving of its hefty premium due to the company’s share gains and dependability with a subscription model. COST YTD mountain Costco YTD We also liked hearing that Costco completed its first targeted media campaign in the quarter. The company understands retail media is a huge opportunity to generate advertising revenue and boost profits. Walmart and Club name Amazon have proved that e-commerce advertising revenue can be big business. Like always, we’d anticipate those profit dollars at Costco would be reinvested in the business to create more value for shoppers. In turn, this will lead to more share gains in the future. We think Costco stock can continue to work in this market, with the company increasing its warehouse footprint, gaining new members, and expanding gross margins. With all three delivered in the quarter, we are increasing our price target to $1,100 per share from $950. That represents more than 11% upside from Thursday’s close. Commentary Total comparable sales increased 5.2% in the quarter, driven by a 5.1% increase in traffic, or shopping frequency, and a 0.1% increase in ticket. The traffic gains tell us that more customers are shopping at Costco’s warehouses more often. That does not a surprise to us. Costco is a big share gainer in the retail world. But what the minimal increase in ticket shows is that they are excelling at keeping costs down. Of course, it’s in Costco’s DNA to be the first to lower prices where and when they can. A few examples of recent price cuts include Kirkland Signature Organic Peanut Butter, Kirkland Signature Chicken Stock, and Kirkland Signature Sauvignon Blanc. Costco improved its gross margin by 25 basis points year over year and 7 basis points, excluding gas inflation, to nearly 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 increased 17 basis points year over year, driven by mix and its credit card co-brand program. The company said sales of its fresh food and non-foods both increased in sales by high single digits on a percentage basis. Some outperforming non-food categories were gold and jewelry gift cards, home furnishings, sporting goods, health and beauty aids, luggage, kiosks, and hardware. All were up double digits in sales. Costco’s ancillary and other businesses, which include pharmacy, food courts, and travel, represented a 16-basis point headwind to gross margin due to gas, partially offset by e-commerce margin improvement. The company’s 2% reward program had a 6-basis point year-over-year benefit. In the quarter, Costco’s membership renewal rate in the U.S. and Canada came in at 92.9%, a tick lower than the 92.8% rate observed in the prior quarter. Worldwide membership renewal experienced a similar dynamic, ticking down to 90.4%. Management attributed the slight dip to an increase in digital sign-ups, which tend to renew at a lower rate. They expect this to have a continued effect on published renewal rates for the remainder of the fiscal year. Still, the number of paid memberships continues to point up. It increased more than 7% year over year to 77.4 million, above the consensus forecast of 77.2 million FactSet showed. Keep in mind the recent membership fee increase – Costco’s first in seven years – hasn’t impacted its fee income yet due to the effects of deferred accounting. Management estimated the fee increase represented less than 1% of fee growth in the quarter. Costco’s warehouse expansion resulted in six net new locations in the quarter. Four were outside the United States. Management expects to add another 26 net new buildings in fiscal 2025, of which 10 will be outside the United States. (Jim Cramer’s Charitable Trust is long COST, AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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