Argus Research has suggested BUY Call for retail major Costco Wholesale Corp with a revised 12-month price target of $1,100. The target price revision reflects Costco’s strong fundamentals, including consistent revenue growth, financial stability, and its ability to cater to value-conscious consumers. Costco’s operational excellence and membership-driven recurring revenue model are key differentiators in a volatile retail sector. The company’s recent quarterly performance and strategic initiatives, such as expanding private-label offerings and international store footprint, further solidify its long-term growth trajectory.

Costco’s Recent Performance and Growth Metrics

Q1 Fiscal 2025 Highlights: Costco reported a 12.8% YoY growth in earnings per share (EPS) to $4.04, exceeding expectations. Total revenue for the quarter rose by 7.5%, reaching $62.15 billion, driven by strong membership fee growth of 7.8%. Comparable sales increased by 5.2%, with U.S. traffic alone up by 4.9%.

Membership Contributions: Approximately 56% of operating income in FY2023 was derived from membership fees, providing Costco with a stable revenue base. The company’s renewal rates remain strong at 92.8% in the U.S. and Canada, underscoring its relevance to loyal members.

Strategic Differentiators and Competitive Edge

Efficient Operations: Unlike competitors such as Amazon and Walmart, Costco operates with a curated selection of 4,000 SKUs, enabling efficient inventory turnover of 12.6 times annually. This approach allows Costco to negotiate favorable pricing with suppliers and pass savings to consumers.

Private-Label Growth: The Kirkland Signature brand now accounts for approximately 28%-29% of Costco’s sales, offering higher margins and driving consumer loyalty. Private-label products are growing faster than the overall business.

International Expansion: Costco’s global footprint now includes 897 warehouses across 14 countries, with 30% of its locations outside the U.S. International markets contributed to 27% of sales and 33% of operating income in FY2024, highlighting the potential for further growth.

Financial Strength and Dividend Policy

Special Dividends and Cash Management: Costco paid a $15 special dividend in January 2024, entirely funded by its existing cash reserves. The company’s cash and short-term investments stood at $11.8 billion at the end of Q1 FY2025, exceeding its total debt of $8 billion.

Regular Dividends and Buybacks: Costco has raised its regular dividend at a compound annual growth rate of 13% over the past five years. The company also maintains a $4 billion share repurchase program, emphasizing its shareholder-friendly capital allocation strategy.

Growth Projections and Valuation

Future Store Expansion: Costco plans to open 26 new stores in FY2025, following the addition of 29 stores in FY2024. Most new openings will be in international markets, where the company sees double-digit growth potential.

EPS and Revenue Growth Forecast: The company’s EPS is projected to grow at a compound annual rate of 12% over the next five years, supported by 3%-6% growth in domestic same-store sales and improving operating margins.

Valuation Analysis: Trading at 55 times FY2025 EPS estimates, Costco’s valuation reflects its unique blend of growth potential, financial strength, and recurring revenue streams. The $1,100 price target is supported by robust free cash flow and consistent dividend growth.

Risks and Challenges

Competition from Amazon and Walmart: Costco faces competitive pressures from Amazon’s Prime membership benefits and Walmart’s expanding delivery services. However, Costco’s focus on pricing power and private-label quality helps mitigate these risks.

Low Margins and Volatility: Operating in a low-margin business requires near-perfect execution. Rising fuel prices and currency fluctuations in international markets could impact margins and earnings volatility.

Actionable Insights for Investors

Membership Model Stability: Costco’s high renewal rates and growing membership fees provide a stable revenue base, making it a reliable long-term investment.
Focus on International Growth: Investors should watch Costco’s expansion in high-growth markets, which could significantly boost its top line.
Private-Label Strength: The Kirkland Signature brand’s increasing penetration is expected to drive higher margins and customer loyalty.