5 Reasons Costco Stock Deserves a High Valuation

Core Insights - Costco's business model continues to justify a premium valuation despite recent share price fluctuations [1][11] - The upcoming fiscal fourth-quarter results are anticipated to reflect strong performance, with net sales growth of 8% already reported [2][11] Membership Model Power - Membership fee income rose 10.4% to $1.24 billion in Q3 FY2025, with paid households reaching 79.6 million [4] - Renewal rates remain high at 92.7% in the U.S. and Canada, and 90.2% globally, with executive members contributing 73% of sales [4] Steady Traffic and Comps - Adjusted comparable sales increased by 8% in Q3, with traffic up 5.2% and e-commerce sales up 14.8% [5] - August sales results indicate mid-single-digit comp growth, with U.S. comps up 5.1% and international comps up 8.6% [5] Price Leadership at Scale - Costco maintains competitive pricing despite macroeconomic challenges, aided by sourcing strategies and Kirkland brand products [7] - The company's scale and limited SKU count help keep operating costs low, enhancing value and customer traffic [7] Room to Keep Expanding - Costco ended Q3 with 905 warehouses and plans to reach approximately 914 locations by fiscal year-end, indicating significant growth potential [8][9] - Trailing-52-week net sales reached roughly $271 billion, up from $252 billion a year earlier [8] Cash Returns and Flexibility - Operating cash flow for the first 36 weeks of FY2025 was $9.47 billion, with cash and equivalents at $13.84 billion [10] - The board raised the quarterly dividend by 12% to $1.30 per share, with special dividends possible in the future [10] Valuation - Shares trade around $943, reflecting a price-to-earnings multiple of 53 to 54 times earnings and a dividend yield of approximately 0.6% [11] - The current premium valuation is close to the limits of what growth can sustain, with strengths in recurring fee income, traffic, price leadership, unit expansion, and cash generation justifying the high premium [11]