In this note, we analyze the factors that could lead to further upside to Costco‘s (NASDAQ: COST) stock price in the coming year. Trefis currently has a $240 price estimate for Costco’s stock, which is slightly ahead of the current market price. In order for the company’s stock to see an upside of more than 25% – to around $300 levels – we estimate that the company’s revenues would have to increase slightly from our base case forecasts and grow to around $156 billion in CY 2019. We have calculated the retailer’s divisional revenues by estimating the number of stores, square footage per store and revenue per square foot in 2019. Further, we also forecast the retailer’s net margin to grow 20 basis points in our upside scenario, translating into net income of $3.7 billion. In addition, we have assigned a P/E multiple of around 31x for Costco and forecast its earnings to be nearly $7.70 per share in 2019 to arrive at our price estimate of $240. If Costco is able to reach our upside case EPS of $8.60 (a higher P/E multiple would be appropriate given the stronger growth prospects), coupled with an earnings multiple of 33x, the company’s stock could reach the $300 mark in 2019. This all can be feasible if the company continues to successfully increase its comparable sales and grow its digital sales even more than we currently forecast in our base case. The company is also looking to expand outside the U.S. market.
We have created an interactive dashboard on Can Costco Reach $300 In 2019? which details steps to arrive at our estimates. You can adjust the drivers to see the impact any changes would have on the company’s share price estimate. In addition, you can also see more Trefis Consumer Discretionary company data here.
Detailing Growth Assumptions For Costco
Costco has had a solid fiscal 2019 so far (year ending Sep. 2019), with revenues increasing 9% year-over-year (y-o-y) to around $70.4 billion, driven by growth in membership fees and a 7% increase in comparable sales. The retailer has been able to consistently grow its U.S. same-store sales in recent months, even after it raised membership fees. This implies that the fee increases have not affected many customers. In fact, the retailer managed to grow its membership base to 96.3 million as of the December quarter, albeit at a slower y-o-y rate. We expect Costco’s membership rate to improve going forward, owing to its international expansion plans, which includes its first Chinese location in Shanghai. As of now, the company operates 30% of its total warehouses in international markets. In our upside case scenario, we have assumed the company could add 17 new stores to its international markets, compared to a previous forecast of 12 stores
Meanwhile, on the e-commerce front, Costco’s online sales increased by 20% y-o-y in the most recent quarter. The company is driving online sales with ongoing site improvements, improved online marketing activities, distinct products and services and the rollout of two online delivery related offerings on dry and fresh groceries. Currently, Costco’s online sales come largely from the U.S. market with a slight share from Canada, Mexico, Taiwan, Korea, and the United Kingdom. Going forward, we expect this growth to be strong as the company plans to expand e-commerce operations into Japan and Australia as well.
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