Costco Wholesale Corporation (COST), a leading membership-based warehouse retailer, last week announced that its Board of Directors declared a special cash dividend on common stock of $15 per share, payable January 12, 2024, to shareholders of record as of the close of business on December 28, 2023. The aggregate amount of the payment will be nearly $6.70 billion.
This marks the fifth special dividend to be paid by Costco in the last 11 years and its largest so far. The special dividends paid previously were in 2012, 2015, 2017, and 2020 in the amounts of $7, $5, $7, and $10, respectively.
COST has shown significant resilience even as other big-box retailers raised caution on the consumer outlook. The recent news of Costco’s special dividend builds on its stellar financial performance in the first quarter of fiscal year 2024.
In addition to the special dividend, the warehouse club chain pays a regular annual dividend of $4.08, translating to a yield of 0.62% at the current share price. Its four-year average dividend yield is 1.36%. Moreover, COST’s dividend payouts have increased at a CAGR of 12.9% over the past three years. Costco has raised its dividends for 19 consecutive years.
After the retailer topped analysts’ estimates in the last reported quarter and announced a $15/share special dividend, shares of COST have been moving up the charts lately. The stock has surged nearly 14% over the past month and more than 28% over the past six months.
Robust Last Reported Financials
For the fiscal 2024 first quarter ended on November 26, 2023, COST reported revenue of $57.80 billion, slightly surpassing analysts’ estimate of $57.79 billion. This compared to the revenue of $53.44 billion in the same quarter of 2022. Its same-store sales grew 3.8% from a year ago. Also, e-commerce sales rose 6.3%, driven by solid demand during the Black Friday weekend.
The company said its sales got a significant boost during the recent Thanksgiving weekend when it sold more than four million pies. Also, COST made $100 million from the sale of gold bars during the quarter.
Costco added nearly 72 million paid household members in the first quarter, an increase of 7.6% compared to the same period last year. Shopping frequency at its stores grew 4.7% worldwide and 3.6% in the U.S.
The retailer’s operating income rose 13.3% year-over-year to $1.98 billion. Its income before income taxes was $2.11 billion, an increase of 19% from the prior year’s quarter. Also, its net income grew 16.5% year-over-year to $1.59 billion. The company posted a net income per share of $3.58, compared to the consensus estimate of $3.42, and up 16.6% year-over-year.
COST’s cash inflows from operating activities were $4.65 billion, up 78.2% from the previous year’s period. As of November 26, 2023, Costco’s cash and cash equivalents totaled $17.01 billion, compared to $13.70 billion as of September 3, 2022.
Improved Discretionary Spending During the Holiday Season
Costco got a solid start to its new fiscal year 2024, as consumer demand for discretionary items surged at the beginning of the holiday season.
According to the National Retail Federation (NRF) forecast, holiday spending is anticipated to reach record levels during November and December this year and will grow between 3% and 4% from 2022 to between $957.30 billion and $966.60 billion.
“It is not surprising to see holiday sales growth returning to pre-pandemic levels,” said Matthew Shay, NRF President and CEO. “Overall household finances remain in good shape and will continue to support the consumer’s ability to spend.
Expanding Store Footprint
During the first quarter of 2024, the company opened ten new locations and plans to open approximately 33 locations over the coming year, up from 23 a year ago.
Costco currently operates 871 warehouses, including 600 in the U.S. and Puerto Rico, 108 in Canada, 40 in Mexico, 33 in Japan, 29 in the United Kingdom, 18 in Korea, 15 in Australia, 14 in Taiwan, five in China, four in Spain, two in France, and one each in Iceland, Sweden, and New Zealand.
In addition, the big-box retailer operates e-commerce sites in the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan, and Australia.
Impressive Historical Growth
COST’s revenue and EBITDA grew at respective CAGRs of 12.4% and 13.2% over the past five years. Its EBIT increased at a CAGR of 13.9% over the same period. Moreover, the company’s earnings from continued operations improved at a CAGR of 14.1% over the same time frame.
Furthermore, the company’s net income and EPS increased at CAGRs of 14.7% and 14.6% over the same period, respectively, while its total assets improved at a CAGR of 7%.
Upbeat Analyst Estimates
Analysts expect COST’s revenue for the second quarter (ending February 2024) to grow 6.1% year-over-year to $58.64 billion. The consensus EPS estimate of $3.56 for the ongoing quarter indicates an 8% year-over-year increase. Moreover, the company has surpassed the consensus EPS estimates in three of the trailing four quarters, which is remarkable.
For the fiscal year ending August 2024, the retailer’s revenue and EPS are expected to increase 4.8% and 10.3% year-over-year to $253.91 billion and $15.61, respectively. Further, Street expects COST’s revenue and EPS to grow 6.7% and 9.2% from the previous year to $270.89 billion and $17.05, respectively.
Mixed Profitability
COST’s trailing-12-month ROCE, ROTC, and ROTA of 27.37%, 16.55%, and 8.84% are considerably higher than the respective industry averages of 11.68%, 6.92%, and 4.83%. However, the stock’s trailing-12-month gross profit margin of 12.53% is 63% lower than the industry average of 33.89%.
Additionally, the stock’s trailing-12-month EBITDA margin and net income margin of 4.42% and 2.65% are lower than the industry averages of 11.26% and 4.90%, respectively. Its trailing-12-month levered FCF margin of 2.83% is 41.7% lower than the industry average of 4.86%.
Elevated Valuation
In terms of forward non-GAAP P/E, COST is currently trading at 42.60x, 136.8% higher than the industry average of 17.99x. Also, the stock’s forward EV/EBITDA and EV/EBIT of 25.28x and 31.75x are significantly higher than the industry averages of 11.25x and 15.30x, respectively.
Further, the stock’s forward Price/Book multiple of 11.77 is 313.6% higher than the respective industry average of 2.85. Its forward Price/Cash Flow of 29.01x is 114.4% higher than the industry average of 13.53x.
Price Target Upgrades
On December 21, equities researchers at Truist Financial raised their price objective on COST stock from $693 to $741. The firm currently has a Buy rating on the retailer’s stock. On December 15, Stifel Nicolaus raised his target price on the stock from $615 to $675 and gave the stock a Buy rating.
Analysts at TD Cowen boosted their price target on COST from $680 to $700, maintaining their Overweight rating. The analysts believe that the company can continue to grow via new stores and increased traffic.
Also, Jefferies analyst Corey Tarlowe increased his target price on Costco’s stock to $725 from $680 and maintained a Buy rating.
“Looking ahead, Costco’s strong value offering, high renewal rates, and club expansion plans make Costco well-positioned, in our view,” Tarlowe wrote in a research note.
Bottom Line
COST’s revenue and earnings surpassed analysts’ expectations in the first quarter of fiscal 2024. With Costco outshining its retail rivals as indicated by its upbeat last reported financials, the company announced a special dividend of $15 per share, its biggest one yet.
In addition to this special dividend, the membership-based warehouse retailer pays a regular quarterly dividend of $1.03 per share. The impressive dividend payout reflects the company’s commitment to returning value to its shareholders and its ability to provide stable growth in the long run.
While analysts seem bullish about Costco’s growth prospects driven by new stores and increased membership and traffic, the stock’s valuation is excessive right now, which is a legitimate concern. An excellent business could be a lousy investment if you overpay for the stock.
Given its stretched valuation and mixed profitability, it could be wise to wait for a better entry point in this stock.
