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Costco Wholesale Corp COST

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Morningstar’s Analysis

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1-Star Price

PREMIUM

5-Star Price

PREMIUM

Economic Moat

PREMIUM

Capital Allocation

PREMIUM

Costco’s Sales Growth Remains Strong Even as Comparisons Become Harder, but the Shares Seem Rich

Zain Akbari, CFA Equity Analyst

Analyst Note

| Zain Akbari, CFA |

We plan to lift our $332 per share valuation of wide-moat Costco by a mid-single-digit percentage after it posted strong third-quarter (ended May 9) earnings. Its 21% revenue growth impressed considering the chain lapped the early days of the pandemic (which included significant customer stock-up activity), but we mostly attribute the results to transitory factors. So, our long-term forecast still calls for mid-single-digit percentage sales growth and 3%-4% adjusted operating margins. We suggest investors seek a more attractive entry price, particularly considering elevated uncertainty as the customer habits normalize.

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Company Profile

Business Description

The leading warehouse club, Costco has 795 stores worldwide (at the end of fiscal 2020), with most sales derived in the United States (73%) and Canada (13%). It sells memberships that allow customers to shop in its warehouses, which feature low prices on a limited product assortment. Costco mainly caters to individual shoppers, but roughly 20% of paid members carry business memberships. Food and sundries accounted for 42% of fiscal 2020 sales, with hardlines 17%, ancillary businesses (such as fuel and pharmacy) nearly 17%, fresh food 14%, and softlines 10%. Costco’s warehouses average around 146,000 square feet; over 75% of its locations offer fuel. About 6% of Costco’s global sales come from e-commerce (excluding same-day grocery and various other services).

Contact
999 Lake Drive
Issaquah, WA, 98027
T +1 425 313-8100
Sector Consumer Defensive
Industry Discount Stores
Most Recent Earnings May 31, 2021
Fiscal Year End Aug 30, 2021
Stock Type Aggressive Growth
Employees 273,000

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