Costco Stock: Can the Momentum Continue?

Costco Wholesale (NASDAQ: COST) continues to be one of the biggest winners in retail, turning in yet another strong quarter amid tariff uncertainty. Its stock also has kept its winning ways, up about 13% year to date and 235% over the past five years (as of this writing).

Let's dig into the retailer's most recent results to see whether its momentum can continue.

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Another strong quarter

Not surprisingly, tariffs were a main topic of discussion when Costco held a call with analysts to discuss its fiscal third-quarter earnings. The company said tariffs pose a significant challenge, but it feels confident in its ability to navigate the current uncertain environment. It's working on ways to mitigate the impact, including sourcing more goods locally and actively rerouting products. It said it also strategically pulled forward seasonal summer items.

Costco is also working on improving the customer experience. This includes things like investing in technology to expedite the checkout process, extending gas-station hours, and opening new locations around high-volume warehouse stores to help alleviate congestion. It also recently added a "buy now, pay later" program for big-ticket items, which it says is showing initial promise.

These initiatives appear to be paying off, with quarterly revenue rising 8% to $63.21 billion and adjusted earnings per share (EPS) increasing 13% to $4.28. That was ahead of the analyst consensus for EPS of $4.24 on revenue of $63.19 billion, as compiled by LSEG.

Same-store sales also rose 8% when adjusting for changes in gasoline prices and foreign currency. U.S. same-store sales jumped 7.9% (adjusted), while Canadian comparable-store sales climbed 7.8% (adjusted). Other international same-store sales increased 8.5% (adjusted). E-commerce revenue increased 15.7% on an adjusted basis.

Excluding gasoline and currency effects, the average transaction was up 2.7% worldwide and 2.3% in the U.S. Traffic climbed 5.2% worldwide and 5.5% in the U.S. Meat and produce performed well in the quarter, while gold and jewelry, toys, housewares, and home furnishings were all up by double-digit percentages.

Membership-fee revenue climbed 10.4% in the quarter to $1.24 billion, as the company continued to benefit from the fee hike that went into effect in September. Memberships, meanwhile, rose by 6.8% to 79.6 million paid households. Higher-cost executive memberships climbed 9% to 37.6 million; these customers account for only 47% of total paid memberships, but 73% of Costco's worldwide sales.

The membership renewal rate was 92.7% in North America and 90.2% worldwide. Both numbers were down slightly due to more digital signups, which have slightly lower renewal rates. The company said that a higher percentage of online signups from younger consumers has led to slightly lower renewal rates.

Costco also continues to expand, opening eight new locations in the quarter. It ended the quarter with 905 warehouse stores and expects to open nine more locations this quarter. It said approximately 80% of its openings in fiscal Q4 will be in markets with high levels of traffic and they will cannibalize some existing store sales, but ease congestion.

Can Costco's momentum continue?

When you compare Costco's same-store sales growth to retail competitors, it's clearly winning and taking market share. Target had an awful quarter in which its comparable-store sales fell 3.8%, but even Walmart's 4.5% growth in U.S. same-store sales couldn't come close to matching Costco's 7.9% rise. Consumers just continue to flock to the value that warehouse stores provide.

As Costco continues to outperform, its valuation has continued to expand. The stock now trades at a forward price-to-earnings (P/E) ratio of 57.5. Costco's stock has always had a premium valuation, but that has really ballooned in the past few years:

COST PE Ratio (Forward) data by YCharts.

While I think Costco is a great company, I also think it's difficult to justify such a high multiple given its revenue growth (with percentages in the low teens). It's adding new locations, but some of these will cannibalize sales at existing stores. In addition, its new-location growth is less than 3% this fiscal year, showing the maturity of the concept.

That said, I also don't know what will stop the stock's momentum. A high valuation has long been a knock on the stock, but it just keeps rising. I personally wouldn't chase it here, but Costco has proved many investors wrong in the past.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.