Costco Stock: Buy, Sell, Or Hold?

Core Insights - Costco reported Q4 earnings of $5.87 per share, an 11% year-over-year increase, with revenue of $86.2 billion, up 8%, surpassing expectations [2] - U.S. comparable sales rose by 5.1%, outperforming Walmart's 4.6% and significantly exceeding Target's 1.9% decline, indicating strong member spending and traffic [2] - Digital sales grew by 13.6% in Q4, and membership income increased by 14% to $1.7 billion, showcasing the effectiveness of its subscription model [2] Financial Performance - Annual top-line growth averaged 7.3% over the last three years, with revenues increasing by 8.1% to $275 billion in the past twelve months [5] - Operating income was approximately $10 billion, with an operating margin of 3.8% and a cash flow margin of 4.6%, generating nearly $12 billion in operating cash flow [6] - Net income reached $8 billion, yielding a net margin of 2.9%, demonstrating Costco's ability to convert growth into profitability [6] Business Model and Strategy - Costco operates 914 warehouses globally, including 629 in the U.S., maintaining pricing advantages through low margins and the effectiveness of its private label brand, Kirkland Signature [7] - Shopping frequency increased by 3.7% in Q4, while the average ticket rose by 2.6%, indicating growth driven by traffic rather than price increases [7] - The flexible supply chain reduces risks from tariffs and global sourcing, with two-thirds of merchandise procured domestically [8] Valuation and Market Position - Costco is trading at 52x earnings and 57x free cash flow, indicating a low cash flow yield of 1.8%, which is high compared to competitors like Amazon [4] - The company's high valuation may not align with its fundamentals, as revenue growth is solid but not extraordinary, and the pace of store expansion is slowing [9] - If comparable sales continue to decelerate, investor confidence and Costco's valuation multiple could face pressure [9]