Costco Delivers a Sales Knockout and Dividend Hike
Here's how the portfolio’s second-largest position should continue to benefit in this environment.
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* Costco delivered knockout March sales and announced a 16% dividend increase.
* We see it benefiting from persistent inflation and an expanding warehouse footprint.
* If April sales show similar strength, it could be a catalyst to revise our price target.
Last night Costco COST reported that its March sales climbed 9.4%, year over year, and announced a 13.7% increase in its quarterly dividend. While there was some benefit because of the Easter holiday, even on an adjusted basis the sales increase confirms consumer wallet share gains, especially as inflation continues to linger. Meanwhile, the hike in the payout is just the latest increase in dividend income for the portfolio and members.
Costco shares have pulled back of late, and these two items should help reverse that trend for the portfolio’s second-largest position. If the stock can move past the 50-day moving average at $728.42, that level should become one of support. We see last night’s positive developments making that likely. For now, we’ll keep our $800 price target, but if the company’s April sales show similar gains, it could be a reason for us to revisit that target with an upward bias.
Breaking Down the Numbers
Breaking down the news in greater detail, March comp sales rose 7.7% year over year, and 7.5% once we account for gas and foreign exchange. On that basis, U.S. comp sales were up 7.3% and 7.4%, respectively, and next week’s March Retail Sales report should confirm wallet share gains. Canada’s comp sales were up a respective 8.9% and 7.3% while Other International came in at 8.6% and 8.4%.
Costco continues to expand its warehouse footprint, which in turn drives its high-margin membership fee revenue stream. Exiting last month, the company had 876 warehouses with 69% in the U.S. compared to 850 at the end of March 2023 with roughly the same percentage for the U.S.
Buried in those numbers, the company doubled the number of warehouse locations in China to six this past March. Other notable warehouse location additions were in the U.S. but also in Japan and Australia. It seems the company’s business model transcends language rather well, especially when we look at the Other International comps sales figures.
Arguably the most surprising comp sales figures were for Costco’s e-commerce business, which climbed 28% year over year, on top of a tough double-digit comp of 14.5% a year ago. We expect overall digital shopping figures in the March Retail Sales report to be strong on the back of Amazon’s AMZN “Big Spring Sale” event as well as competing offers. When we review that report we will be looking to see if Costco picked up wallet share there as well.
In terms of the dividend increase, the company’s new quarterly dividend of $1.16 per share, up from the prior $1.02, will be paid on May 10 to shareholders of record on April 26.
At the time of publication, TheStreet Pro Portfolio was long COST and AMZN.
