Costco (NASDAQ:COST) Exceeds Q4 Expectations

Radek Strnad /
2023/09/26 4:44 pm EDT

Membership-only discount retailer Costco (NASDAQ:COST) reported Q4 FY2023 results beating Wall Street analysts' expectations, with revenue up 9.5% year on year to $78.9 billion. Turning to EPS, Costco made a GAAP profit of $4.86 per share, improving from its profit of $4.20 per share in the same quarter last year.

Is now the time to buy Costco? Find out by accessing our full research report, it's free.

Costco (COST) Q4 FY2023 Highlights:

  • Revenue: $78.9 billion vs analyst estimates of $78 billion (1.25% beat)
  • EPS: $4.86 vs analyst estimates of $4.78 (1.76% beat)
  • Gross Margin (GAAP): 12.3%, up from 11.8% in the same quarter last year
  • Same-Store Sales were up 3.8% year on year (slight miss vs. expectations of up 3.9% year on year)
  • Store Locations: 861 at quarter end, increasing by 23 over the last 12 months

Designed to be a one-stop shop for the suburban consumer, Costco (NASDAQ:COST) is a membership-only retail chain that sells groceries, apparel, toys, and household items, often in bulk quantities.

Large-format Grocery & General Merchandise Retailer

Big-box retailers operate large stores that sell groceries and general merchandise at highly competitive prices. Because of their scale and resulting purchasing power, these big-box retailers–with annual sales in the tens to hundreds of billions of dollars–are able to get attractive volume discounts and sell at often the lowest prices. While e-commerce is a threat, these retailers have been able to weather the storm by either providing a unique in-store shopping experience or by reinvesting their hefty profits into omnichannel investments.

Sales Growth

Costco is a behemoth in the consumer retail sector and benefits from economies of scale, an important advantage giving the business an edge in distribution and more negotiating power with suppliers.

As you can see below, the company's annualized revenue growth rate of 12.2% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was impressive as it opened new stores and grew sales at existing, established stores.

Costco Total Revenue

This quarter, Costco reported solid year-on-year revenue growth of 9.5% and its revenue of $78.9 billion outperformed analysts' estimates by 1.25%. Looking ahead, the analysts covering the company expect sales to grow 4.91% over the next 12 months.

While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Number of Stores

When a retailer like Costco is opening new stores, it usually means that demand is greater than supply, and in turn, it's investing for growth. Since last year, Costco's store count increased by 23 locations, or 2.74%, to 861 total retail locations in the most recently reported quarter.

Costco Operating Retail Locations

Over the last two years, the company has generally opened new stores and averaged 2.69% annual growth in its physical footprint, which is decent and on par with the broader sector. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Same-Store Sales

Costco's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 8.42% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, Costco is reaching more customers and growing sales.

Costco Year On Year Same Store Sales Growth

In the latest quarter, Costco's same-store sales rose 3.8% year on year. By the company's standards, this growth was a meaningful deceleration from the 10.4% year-on-year increase it posted 12 months ago. One quarter fluctuations aren't material for the long-term prospects of a business, but we'll watch Costco closely to see if it can reaccelerate growth.

Key Takeaways from Costco's Q4 Results

With a market capitalization of $248 billion, a $15.2 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Costco has the resources needed to pursue a high-growth business strategy.

It was good to see Costco beat analysts' revenue and EPS expectations this quarter, even though the beat was relatively small. On the other hand, all-important same store sales growth missed slightly, driven by underperformance in the US. Overall, this was a fine quarter for Costco with no major surprises. The market was probably expecting something slightly better, and the stock is down 1.67% on the results and currently trades at $544.25 per share.

Costco may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned in this report.