Shares of Costco Wholesale Corporation COST have shown a remarkable run on the bourses, surging 28.7% over the past year. This impressive uptick in the stock price has left investors contemplating whether this momentum can continue or if the stock is due for a pause. 

Consistent same-store sales growth, robust membership renewals and continued strength in high-frequency consumer categories are the reasons behind Costco’s rally. The company’s value-driven model and loyal customer base have made it a standout among big-box retailers, even in difficult economic terrain.

Closing at $916.48 yesterday, Costco has outpaced the industry, which has risen 9.7%, and the broader S&P 500 index, which has declined 2% in the said period.

Costco has even outperformed its peers, such as Dollar General Corporation DG, Target Corporation TGT and Dollar Tree, Inc. DLTR. Shares of Dollar General, Target and Dollar Tree have declined 40.9%, 43.6% and 47.3%, respectively, in the past year.

COST Stock Past-Year Performance

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With its market dominance and resilient business model, Costco has long been a favorite among investors seeking stable growth. But with the stock’s hefty gain, is it still a compelling buy, or has it become too expensive? Let's dive into the fundamental drivers that are keeping Costco’s stock in the spotlight.

Costco’s Strong Membership Base: A Key Driver

Costco’s resilient business model, centered around a membership-based structure, continues to be a major growth driver. The company’s high membership renewal rates, coupled with its efficient supply chain management and bulk purchasing power, ensure competitive pricing. The renewal rate remained extremely strong at 93% in the United States and Canada and 90.5% worldwide. This robust model has allowed Costco to thrive, even during economic downturns.

The warehouse operator ended the second quarter of fiscal 2025 with 78.4 million paid household members, up 6.8% from the prior year. Executive memberships, a more profitable category for Costco, grew by 9.1% year over year to reach 36.9 million, now accounting for 47.1% of all paid members and driving 73.8% of worldwide sales. Membership fee income rose 7.4% year over year. The recent membership fee increase contributed about 3% to membership fee income in the quarter, with most benefits expected to materialize in the final quarter of the current fiscal and the first quarter of the next fiscal year.

E-commerce continues to shine, with comp sales up 20.9%, or 22.2% adjusted for FX in the second quarter. This reflects Costco’s successful digital transformation strategy, as it improves online product assortment and fulfillment efficiencies. With more customers opting for omnichannel experiences, Costco’s online strength supports overall traffic and sales momentum.
Costco’s physical footprint continues to expand. With only one warehouse opened in the second quarter, the company is accelerating expansion through the remainder of fiscal 2025, aiming for 28 new openings, including 25 new warehouses and three relocations. 

With cash and cash equivalents (including short-term investments of $802 million) of $13,158 million at the end of the second quarter, Costco looks quite comfortable from the liquidity point of view. Management allocated $1.14 billion to capital expenditures in the second quarter and has outlined a substantial $5 billion expenditure plan for fiscal 2025. These strategic investments underscore Costco's commitment to long-term growth.

Competitive Landscape: Can Costco Stay Ahead?

Costco's impressive sales figures are part of a larger retail picture where competition is intensifying. Rivals like Dollar General and Target are investing in expanding their e-commerce capabilities and enhancing customer experience. Dollar Tree is gaining momentum as it sharpens its focus on its core brand and leverages the success of its multi-price 3.0 stores.

Moreover, margins remain a critical area to monitor, with potential concerns stemming from any deleverage in the selling, general and administrative rate. Additionally, foreign exchange volatility and tariffs on key imports create uncertainty. Meanwhile, consumer spending is shifting toward essentials, with discretionary seeing weaker demand.

Valuation: Is Costco Stock’s Price Justified?

Costco is trading at a significant premium to its peers. Costco's forward 12-month price-to-earnings ratio stands at 48.20, higher than the industry’s ratio of 29.95 and the S&P 500's 18.58. 
 

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Investors should evaluate whether Costco's growth trajectory justifies its premium valuation while considering the associated risks, particularly in a changing macroeconomic environment. For those with a long-term investment horizon, Costco's historical performance and strategic initiatives may present a compelling case for holding the stock.

How Consensus Estimates Stack Up for Costco

Over the past 30 days, analysts have decreased their estimates for the current fiscal year by 9 cents to $17.94. However, for the next fiscal year, the Zacks Consensus Estimate has risen by 4 cents to $19.73. These estimates indicate expected year-over-year growth rates of 11.4% and 10%, respectively.
 

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How to Play Costco: Buy, Hold or Sell?

Costco’s strong fundamentals, including a growing membership base, solid e-commerce sales and strategic investments, continue to support its market leadership. While the stock’s premium valuation and potential margin pressures warrant caution, its resilient business model offers a compelling case for long-term investors. However, a careful assessment of entry points is essential. Costco currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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