Costco’s Q2 Sales Slightly Below Expectations, But EPS Exceeds: Hold for Now

With Costco’s (COST) second-quarter earnings per share (EPS) exceeding market expectations, advice suggested that the stock should be held, even amidst valuation concerns.

Costco’s sales for the second quarter of the fiscal year 2024 (November 27, 2023 – February 18, 2024, 12 weeks) increased by 5.7% from the previous year to $58.4 billion. The GAAP-based EPS increased by 18.8% from the last year to $3.92. While sales fell short of market expectations by 1.0%, The EPS exceeded market expectations by 8.5%. The growth of existing stores in the US during the second quarter increased by 4.8% compared to the same period last year, and the number of customers increased by 4.3%.

Kim Myung Ju, a researcher at Korea Investment Securities, estimates that “even excluding one-time factors, the EPS slightly exceeded expectations.” He judged, “It’s regrettable that the sales fell slightly short of market expectations this quarter, but Costco’s channel competitiveness remains unchanged.”

Costco mentioned that the sales share of its private brand, Kirkland Signature, increased by 1.5 percentage points compared to the same period last year this quarter. It is estimated that the sales share of the cost-effective private brands is over 30%, which is about 20% higher than other retailers in the US.

It’s positive that the North American membership renewal rate increased by 0.1 percentage points from the previous quarter, reaching a record high, and the number of members and income steadily increased.

However, the valuation is entering a burdensome section.

Costco is trading at a price-earnings ratio (PER) of 49.5 times based on FY2024. Although it is expected to continue to play a defensive role among foreign consumer goods companies, considering the burden of valuation, it will be difficult to outperform the index as much as in the past.

The researcher stated, “Although no specific plans regarding membership fee increases were mentioned this quarter, the possibility of a membership price increase still exists.” Considering channel competitiveness, he recommended a hold strategy, even though a valuation burden exists.