Costco's (NASDAQ:COST) Posts Q1 Sales In Line With Estimates

Full Report / December 14, 2023

Membership-only discount retailer Costco (NASDAQ:COST) reported results in line with analysts' expectations in Q1 FY2024, with revenue up 6.2% year on year to $57.8 billion. It made a GAAP profit of $3.58 per share, improving from its profit of $3.07 per share in the same quarter last year.

Key Takeaways from Costco's Q1 Results

Despite slightly missing same-store sales expectations on a consolidated basis and in the US specifically, Costco managed to beat revenue expectations by a small margin. Slightly better profits led to a more convincing EPS beat. No guidance was given in the earnings release. Overall, we think this was a fine quarter with no major surprises. Investors were likely expecting more, especially on the same-store sales lines, however, and the stock is down 1.5% after reporting, trading at $621.99 per share.

Costco (COST) Q1 FY2024 Highlights:

  • Market Capitalization: $284.9 billion
  • Revenue: $57.8 billion vs analyst estimates of $57.79 billion (small beat)
  • EPS: $3.58 vs analyst estimates of $3.42 (4.8% beat)
  • Free Cash Flow of $3.61 billion, up 133% from the same quarter last year
  • Gross Margin (GAAP): 12.7%, up from 12.2% in the same quarter last year
  • Same-Store Sales were up 3.9% year on year (slight miss vs. expectations of up 4.0% year on year; US same-store sales also missed slightly)
  • Store Locations: 871 at quarter end, increasing by 24 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.

The company is well known for offering these products at lower prices than most of its competitors. Costco is able to offer low prices due to its lean operating model that prioritizes low overhead costs and high inventory turnover. If you walk into a Costco store, the products are presented in a warehouse format, stacked high and with many products still sitting in their original boxes and palettes, rather than neatly presented as individual packages on shelves. This reduces store labor costs.

Costco's core customer is the value-conscious suburban shopper who is willing to buy in bulk to save money. These customers must pay for an annual membership, as non-members are not allowed to enter Costco locations. On the other hand, consumers living in cities often do not frequent Costco because their smaller homes or apartments cannot accommodate that 64-roll package of toilet paper.

In addition to groceries, electronics, and apparel, Costco also offers other consumer services so their customers don’t have to go elsewhere. Pharmacies, photo centers, and vision services/eyeglass retailers are common in their roughly 150,000 square foot stores. Outside the majority of Costco stores, there is also a gas station for quick and convenient fill ups.

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.

Competitors that offer groceries and/or other general merchandise in large-format stores include BJ’s Wholesale Club, Walmart (NYSE:WMT), and Kroger (NYSE:KR).

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 12.3% 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 grew its revenue by 6.2% year on year, and its $57.8 billion in revenue was in line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 4.8% over the next 12 months, a deceleration from this quarter.

Number of Stores

A retailer's store count often determines on how much revenue it can generate.

When a retailer like Costco is opening new stores, it usually means it's investing for growth because demand is greater than supply. Since last year, Costco's store count increased by 24 locations, or 2.8%, to 871 total retail locations in the most recently reported quarter.

Costco Operating Retail Locations

Taking a step back, the company has generally opened new stores over the last eight quarters, averaging 2.7% annual growth in its physical footprint. This is decent store growth and in line with other retailers. 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 7.7% 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 3.9% year on year. This growth was a deceleration from the 7.1% year-on-year increase it posted 12 months ago, showing the business is still performing well but lost a bit of steam.

Gross Margin & Pricing Power

Costco has poor unit economics for a retailer, leaving it with little room for error if things go awry. As you can see below, it's averaged a 12.3% gross margin over the last two years. However, when comparing its margin specifically to other non-discretionary retailers, it's actually pretty decent. That's because non-discretionary retailers have structurally lower gross margins as they compete to provide the lowest possible price, sell products easily found elsewhere, and have high transportation costs to move their goods. We believe the best metrics to assess these types of companies are free cash flow margin, operating leverage, and profit volatility, which take their scale advantages and non-cyclical demand characteristics into account. Costco Gross Margin (GAAP)

Costco produced a 12.7% gross profit margin in Q1, flat with the same quarter last year. This steady margin for a retailer like Costco, which is structurally less profitable than the typical retail business for the reasons mentioned above, signals that it has stable input costs (such as freight expenses to transport goods) and aims to keep prices low for consumers.

Operating Margin

Operating margin is an important measure of profitability for retailers as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Costco generated an operating profit margin of 3.4%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.

Costco Operating Margin (GAAP)

Zooming out, Costco was profitable over the last two years but held back by its large expense base. Its average operating margin of 3.5% has been paltry for a consumer retail business. Its margin has also seen few fluctuations, meaning it will take a big change to improve profitability.


Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q1, Costco reported EPS at $3.58, up from $3.07 in the same quarter a year ago. This print beat Wall Street's estimates by 4.8%.

Costco EPS (GAAP)

Between FY2020 and FY2024, Costco's adjusted diluted EPS grew 59.4%, translating into a solid 14.8% average annual growth rate.

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 8.9% year-on-year increase in EPS.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe in the end, cash is king, and you can't use accounting profits to pay the bills.

Costco's free cash flow came in at $3.61 billion in Q1, up 133% year on year. This result represents a 6.2% margin.

Costco Free Cash Flow Margin

Over the last two years, Costco has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 2.4%, slightly better than the broader consumer retail sector. Furthermore, its margin has averaged year-on-year increases of 2.5 percentage points. This likely pleases the company's investors.

Return on Invested Capital (ROIC)

We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.

Over the last five years, Costco had a strong competitive position and its management team did a wonderful job investing in profitable growth initiatives. Its five-year average ROIC was 37.7%, placing it among the best retail companies.

Is Now The Time?

Costco may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think Costco is a good business. First off, its revenue growth has been solid over the last four years. And while its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses, its stellar ROIC suggests it has been a well-run company historically. On top of that, its unparalleled brand makes it a household name consumers consistently turn to.

Costco's price-to-earnings ratio based on the next 12 months is 39.4x. There are definitely a lot of things to like about Costco, and looking at the consumer landscape right now, it seems the company trades at a pretty interesting price.

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