Following Costco’s (COST) Fiscal Q4 2024 earnings release in late September, the stock has paused from its extended rally. Concerns certainly remain regarding its elevated valuation. The company continues to enjoy steady growth, with the outlook for Fiscal 2025 looking highly encouraging. That said, does Costco’s overall performance justify its forward P/E ratio of nearly 50x? This article will break down Costco’s Q4 results and management’s FY2025 outlook. I will also discuss the risks tied to the stock’s high valuation, prompting me to retain a neutral stance.
Costco Sustained Strong Revenue Growth in Q4
Costco’s Q4 2024 revenue reached $78.2 billion, up 1.0% from the previous year. However, adjusting for the extra week in last year’s Q2 translates to an adjusted 7.3% rise in net sales, which looks much more substantial. Comparable sales were up 5.4% globally, with the U.S. seeing a 5.3% gain and international markets showing even more substantial growth. Canada and other regions posted 5.5% and 5.7% growth, respectively. E-commerce also shined brightly, with a nearly 19% jump in comparable sales.
Several factors powered this growth. Costco opened 14 new warehouses during the quarter, expanding its footprint to 891 locations globally. Further, the company saw a significant 6.4% boost in traffic across its stores worldwide, which helped neutralize a slightly lower average transaction size. Foreign exchange and gasoline price fluctuations negatively impacted headline figures. Still, on an adjusted basis, the company’s metrics suggest healthy demand across categories, particularly in non-foods. Furniture and seasonal items delivered strong numbers.
Profitability Continued to be Solid
Costco’s profitability remained solid in Fiscal Q4, with net income rising 9% year-over-year to $2.35 billion, or $5.29 per share. When normalized for the extra week last year, EPS was up by an even more impressive 12.6%. Aside from higher revenues, earnings were powered by gross margins expanding by 40 basis points to 11%. Margin gains were driven mainly by favorable performance in ancillary businesses like gasoline and e-commerce. Additionally, Costco’s core-on-core margins benefited from a better mix and efficiency in fulfillment. These are encouraging numbers, but aren’t enough to sway me into the bullish camp today.
It’s worth noting that operating expenses did rise slightly, with SG&A up by 8 basis points, primarily due to higher wages for employees in the U.S. and Canada. However, management stressed that while wage investments remain a core part of Costco’s strategy, the company was able to balance these costs with productivity gains and sales leverage.
COST’s Outlook for FY2025
Looking ahead to FY2025, Costco’s management provided an optimistic outlook during its earnings call. While the company refrained from offering specific guidance, as has been the norm historically, it still expressed confidence in the momentum heading into the new fiscal year. Critical drivers include Costco’s continued investment in employee wages, member value, and e-commerce expansion.
The recent membership fee increase, which took effect in September 2024, will also boost revenue in the second half of FY2025 and into FY2026, as deferred accounting practices delay the full impact of the fee hikes. There are also growth opportunities in both Costco’s warehouse and e-commerce businesses, with 29 new store openings planned for FY2025, 12 of which will be international. Of course, certain headwinds are expected, such as foreign exchange volatility. But overall, Costco’s outlook seems more or less robust.
Valuation Is Still a Concern
Despite Costco’s solid results and favorable outlook for the upcoming year, I believe the stock’s valuation remains a key concern. On the one hand, Wall Street sees continued growth, with the FY2025 consensus EPS estimate standing at $17.79. This implies a year-over-year increase of 10.4%, marking another year of double-digit growth. On the other hand, those same figures also imply the stock is trading at a forward P/E of 49.3x. That multiple remains exceptionally high for a retailer, even one as successful as Costco.
While the premium valuation reflects Wall Street’s confidence in Costco’s long-term prospects, it leaves little room for error. This is a critical consideration, especially since COST stock’s prolonged rally over the past year has been mainly driven by a valuation expansion, not earnings growth. I don’t blame investors for banking on Costco’s ability to continue delivering robust earnings growth, but a valuation this generous introduces more risk into the equation.
If the company faces any headwinds, such as a slowdown in consumer spending, higher operational costs, or intensified competition, the stock could experience a sharp correction given how much future growth is already priced in. The stock looks priced beyond perfection, and therefore any deviation from expectations could result in major downside potential, in my view.
Is COST Stock a Buy, According to Analysts?
Looking at Wall Street’s view on the stock, Costco maintains a Moderate Buy consensus rating based on 16 Buys and eight Hold ratings assigned in the past three months. At $937.91, the average COST stock price target implies about 6% potential upside.
If you’re unsure which analyst you can trust if you wish to transact in COST stock, Mark Astrachan is the most accurate analyst covering the stock (on a one-year timeframe). He boasts an average return of 25.4% per rating and a 94% success rate.
Takeaway
Overall, Costco’s Q4 2024 results reflected another quarter of excellent growth across its top and bottom lines, supported by robust global sales, e-commerce performance, and expanded gross margins. Looking ahead, management remains optimistic about FY2025, with new store openings and membership fee hikes expected to drive revenue growth.
Nonetheless, concerns remain about Costco’s elevated valuation. At a forward P/E ratio of nearly 50x expected earnings, COST stock has a valuation that leaves no room for error. This means that any headwinds, such as consumer spending slowdowns or rising costs, could lead to a significant share price correction. Hence, I land on a neutral stance for the stock.
