Here’s Where We Stand on Costco After Its Earnings Release
This is what we’re watching in terms of our price target, and where we could add shares.
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Building on our quick discussion of Costco (COST) shares in this morning’s 8 Key Items, we are maintaining our $1,150 price target for the membership-driven warehouse company. We will also reiterate our view that the company’s quarterly results Thursday night were solid, as were the membership metrics and renewal rates.
Because the company’s monthly comp sales figures continue to point to wallet-share gains, with the exception of the high-margin membership revenue, its earnings reports are becoming more of a non-event, even though they shed light on what we find to be a very powerful part of the Costco story. We see that as the steady growth in the high-margin membership fee revenue stream that follows the company’s warehouse expansion effort.
On that front, during Thursday night’s earnings call, management reiterated plans targeting 30+ new openings per year in the coming years. For a company that doesn’t give guidance, that roadmap points to what should be a steady step up in the core driver of profits and bottom-line results.
That’s not to say there weren’t some other interesting comments made during the earnings call:
Digital Shopping
While the attention on Costco tends to be on the warehouse, the monthly comp figures tell us its efforts to lean into digital shopping are paying off. What we learned was that average same-day delivery time in the U.S. is now less than 45 minutes, and the average member satisfaction rating is 4.8 out of 5.
More importantly, same-day delivery is growing even faster than the overall digital business, which was up 21% year over year for the reported April quarter. That, along with its adjusted comp sales figures for the U.S., more than suggests Costco is holding its own against the likes of Walmart (WMT) and Target (TGT).
Tariffs
On the topic of tariffs, Costco has started submitting refund claims for the IEEPA tariffs, a process that is likely to take a few months. Management expects to start receiving refunds on approved claims on a rolling basis over the following two to three months, and its plan is to return a portion of tariffs that were passed onto the membership.
How much and in what form is to be determined, but our suspicion is that it will be in the form of a reward certificate like the ones issued for Executive members that can be used to pay for merchandise or one’s annual membership renewal fee. A nice move that keeps the dollars flowing back to Costco.
Special Dividend?
Exiting the quarter, Costco had around $45 in cash per share on the balance sheet, and that sparked the inevitable question about a special dividend. Every few years, Costco has paid a special dividend to shareholders, and as its warehouse footprint and membership base grow, odds are the company will continue this practice.
As management reiterated on the earnings call, the “special dividend is typically the most effective way to return excess cash.” At the same time, the team said that as of now, it has no plans to “at the present time.” Part of that likely reflects the warehouse expansion plans mentioned, but, in our view, a special dividend is only a matter of time.
To us, the key to Costco’s business is the relationship between growing the number of warehouse locations, which feeds the membership revenue stream and merchandise volumes. Provided Costco doesn’t make the location over-saturation mistake we’ve seen from the likes of Starbucks (SBUX) and others, we are inclined to remain owners of the shares to capture further upside and the benefit of future special dividend payments.
Price Target and Share Move Thoughts
What it would take to increase our price target? We will revisit our target following the company’s upcoming monthly sales reports. The next one, for May, will be published next week on June 3.
In terms of making a move with the shares, they are down high-single digits off their May high, and testing support at the 50-day moving average ($1,007). However, we have another layer of support near $990. That means we’ll be tracking COST closely in the coming days to see what support levels hold up. We’ll also be keeping that June 3 date in mind.
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At the time of publication, TheStreet Pro Portfolio was long COST.
