But as pandemic restrictions are easing in many regions, and Costco stock trades near all-time highs, is it still a bet for future growth?
The outlying success continues
Costco, like most large supermarket chains, typically demonstrates single-digit quarterly sales growth. That changed in 2020 when the pandemic powered higher sales as customers focused on essentials, and for the past four quarters, sales have increased double digits year over year. In fact, its highest increase came in its most recent reported quarter, the fiscal third quarter ended May 9, with 22% sales rise year over year. That happened as the economy began to reopen and people focused on nonessentials. Lest you think things may have changed since then, July sales increased 16% year over year.
Costco struggled with supply issues for certain large items such as electric appliances over the past year, and posted its incredible results with low supply of expensive items as well as some closed categories, such as travel and optical. But those trends have reversed with these categories functioning again, so even as essentials stocking slowed down, other sales ramped up.
E-commerce has decelerated as well, but it's still increasing, up 41% in Q3 and 7% in July. It upgraded logistics for the e-commerce program so delivery is faster and cheaper, and margins improved. Costco faced inflationary pressures in Q3, and gross margin was slightly lower year over year. The company said that inflation may impact prices going forward, but so far it's trying to keep retail prices down. Costco's margins, generally about 11% to 12%, are lower than other food chains. But it makes up for some of that in customer loyalty, through sheer volume and membership fees.
What the future holds
Costco is, believe it or not, fairly small as far as store count. As of July, it operates 813 warehouses, with 562 in the U.S. and the rest international. It's nowhere near saturation, and it has plans to open new warehouses, but it goes pretty slowly as compared with similar companies. It opened 21 net new stores so far in 2021, and it's expecting to open 25 in each of the next two fiscal years. It recently established a footprint in China, with plans for a second store, opening up an entire new and huge market.
Walmart, in contrast, has almost 5,000 stores just in the U.S., while Target has over 1,900. Costco is the 12th-largest company in the U.S. by sales, way ahead of Target, which means each store makes it a lot of money. That's why it doesn't need to go on a frantic opening craze, and why investors can expect Costco to grow for a very long time.
Costco's customers are loyal, and retention generally hovers around 90%, plus it adds millions of new customers annually.
Finally, its dividend only yields 0.66%, but it has raised it annually for the past 14 years, and it has a paid a plush special dividend of between $5 and $10 every two or three years since 2013.
My conclusion is that investors shouldn't worry about buying near all-time highs. Costco can keep delivering growth and gains for investors well into the future.