Costco Stock Drops on Mixed Earnings: Should You Buy?

Costco Wholesale Corp (NASDAQ:) stock was down 1.7% Friday after the big box retailer mixed results for its fiscal fourth-quarter earnings.

The results were solid, as revenue ticked up 1% to $79.7 billion, year over year, but it came in below estimates of $79.96 billion.

Net income jumped 9% to $2.35 billion, or $5.29 per share, which easily topped estimates of $5.07 per share.

Costco stock was down about 2.6% on Friday morning to around $877 per share, in part due to the slight revenue miss. But there is more to it than that. Let’s take a closer look at the numbers.

Earnings rise by 9%

There was a lot to like in Costco’s results, starting with the bottom line. The 9% rise in earnings was helped by good expense management, as merchandise costs were kept in check, rising just 0.5% year over year. The firm also benefitted from a $63 million one-time tax benefit.

On the sales side, same-store sales results were impressive, as sales grew 6.9% on an adjusted basis at existing stores. This topped estimates of 6.4% same-store sales growth.

Costco’s e-commerce numbers were strong, as well, rising 19.5% year over year, just a tick below estimates of 19.6% growth.

Costco now has 891 stores around the world, with 14 added in the quarter. For the full fiscal year, Costco added 30 stores.

One area that investors probably didn’t like was the membership fees, which were stagnant. Membership fees were essentially flat at $1.51 billion, which was less than the $1.54 billion that analysts had anticipated. The renewal rate was 92.9%, down 0.1% from the previous quarter.

Costco raised its membership fee starting September 1, something it typically does every five years, but this time around the increase was deferred for two more years.

CFO Gary Millerchip said on the earnings call that the raise will have minimal impact on revenue early in the upcoming fiscal year. Most of the benefit will come in the back half of fiscal 2025 and 2026.

Is Costco stock a buy?

The slight revenue and membership fee were probably not the major reasons why the stock price was slipping on Friday.

It more likely had to do with Costco’s high valuation, in relation to the somewhat muted growth numbers.

Costco stock is up about 34% year-to-date, but its valuation is extremely high, particularly for a retail stock heading into 2025, when economists expect slower economic growth in the U.S.

It is trading at 54 times earnings, up from about 40 a year ago. Also, its forward P/E is 51, which is also extremely high.

Friday’s selloff probably had more to do with the high valuation and earnings results that didn’t justify it.

Costco has been a great stock over the years; both steady and reliable with an average annualized return of 21% over the past 10 years.

It also got a slew of price target upgrades from Wall Street analysts after earnings were posted Thursday after the market closed.

But, in my view, at its current high valuation, Costco stock doesn’t look like a great buy right now, mainly because of the valuation.

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