Costco (NASDAQ: COST) has been one of the most dominant retailers in modern history.
The warehouse operator pioneered a unique model, selling bulk goods at bargain prices to paying members. While Costco faces competition in the category from BJ's Wholesale and Walmart's Sam's Club, Costco is the clear leader in warehouse retail.
The stock has a market cap of $451.5 billion, as of May 27, and has a long track record of beating the market and delivering steady growth.
So where will Costco be in five years? It's impossible to know for sure, but we can take some educated guesses based on the company's current trajectory. Let's take a closer look.
Image source: Costco.
Costco's growth plan
Costco's growth is relatively easy to model compared to most stocks. The warehouse retailer opens a handful of stores each year and typically grows through same-store sales, which includes e-commerce. Costco can also grow its revenue through increased membership income, which can come from growing its membership base, or raising its membership income, which it typically does every five years.
Costco finished fiscal 2024 on Sept. 1, 2024 with 890 warehouses, having added 29 warehouses in fiscal 2024 and 23 locations in 2023.
Based on that information, observers might assume that Costco will add 26 warehouses per year, bringing its grand total to 1,020. Costco operates in several countries in addition to the U.S. with a substantial presence in Canada, giving it ample opportunity to expand both in the U.S. and outside of it.
In the last two years, Costco's comparable sales increased by 5% and 6% in fiscal 2023 and 2024, respectively, adjusted for currency exchange and gas prices, so it's fair to model 5% comparable sales growth for Costco or 7% revenue growth with the impact of new stores.
Additionally, Costco raised its membership fee for the first time in seven years to start fiscal 2025 with prices on its standard gold star membership rising from $60 to $65, and the executive membership jumping from $120 to $130. Costco has grown its membership base, which finished fiscal 2024 with 76.6 million paid members (households), by about 7% each year over the last two years.
What revenue would look like in five years
By the end of fiscal 2029, Costco should have around 1,020 warehouses in five years, and assuming its sales grow by around 7% annually over the next five years, Costco's net sales would increase from 249.6 billion in fiscal 2024 to $350.1 billion.
Costco's membership income is especially powerful because it essentially goes straight to the bottom line. The retailer finished the last fiscal year with $4.8 billion in membership fees, and that figure should increase by 15% in the first year to account for the membership price hike and a 7% increase each year after that. That would bring membership income to $7.2 billion. Combined with Costco's net sales, the company would have revenue of $357.3 billion.
On the bottom line, Costco's gross margin is likely to hold steady as the company is committed to offering low prices and its gross margins tend to be lower than comparable retailers. As of its most recent quarter Costco's gross margin was 12.7% over the last four quarters.
Selling, general, and administrative expenses as a percentage of revenue came down in 2021 and 2022 and finished at 9% over the last four quarter as of the most recent quarter. Costco could achieve some margin expansion over the next five years. Let's assume it increases from 3.7% to 4% due in part to the benefit from increasing membership income, giving the company operating income of $14.3 billion.
Costco earned $455 million in net interest income last year, but it's hard to predict how that will change. The company's shares outstanding have also been flat in recent years so investors should expect a change. Assuming a 25% income tax rate, Costco would have roughly $25 in earnings per share in five years, up 51% from last year.
Is Costco a buy?
The above information is just a forecast, but Costco's current valuation seems to anticipate that the retailer will grow earnings faster than that, or give shareholders another benefit, like a special dividend.
At a share price of more than $1,000 currently, Costco is trading at more than 40 times the fiscal 2029 estimate for earnings above. At that price, the stock doesn't look like a smart buy.
Costco is a great company, but investors are better off waiting for a more attractive valuation to buy the stock, given the high prices and its more moderate growth prospects.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
