Global Expansion, E-Commerce Boom, And Executive Memberships To Fuel Sales And Profit Growth

Key Takeaways

• International warehouse expansion and growing e-commerce sales are expected to drive revenue growth and improve net margins.
  
• Increasing memberships and innovation in private label products are likely to enhance gross margins and support income growth.
  
• Currency fluctuations, wage increases, and port disruptions pressure Costco's profit margins, interest income, and membership stability, potentially impacting revenue and earnings.

Catalysts

Engages in the operation of membership warehouses in the United States, Puerto Rico, Canada, Mexico, Japan, the United Kingdom, Korea, Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden.

• The continued addition of new warehouses, including international expansion, is expected to drive future growth in net sales as it allows Costco to reach more customers and increase its market penetration.
  
• The growth in Costco's e-commerce sales, particularly in big and bulky items fulfilled by Costco Logistics, signals potential increases in revenue and improvements in operational efficiency, ultimately benefiting net margins.
  
• The implementation of technology enhancements, such as improved inventory management and retail media strategies, has the potential to drive revenue growth and improve sales efficiency, which could positively impact earnings.
  
• The increasing membership base, especially the growth of Executive Memberships, is likely to contribute to higher membership fee income, which supports net income growth.
  
• Innovation in private label (Kirkland Signature) and new product categories, combined with competitive pricing strategies, is expected to enhance gross margins by attracting higher volumes of traffic and transactions.

Costco Wholesale Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Costco Wholesale's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 3.2% in 3 years time.
• Analysts expect earnings to reach $9.9 billion (and earnings per share of $23.05) by about December 2027, up from $7.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 52.8x on those 2027 earnings, down from 56.2x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 25.9x.
• Analysts expect the number of shares outstanding to decline by 0.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Costco Wholesale Future Earnings Per Share Growth

Risks

• Currency fluctuations and gas price deflation negatively impacted sales, which could continue to affect revenue and profit margins.
  
• Increasing employee wages contributed to higher SG&A costs, which could pressure net margins if not offset by sales growth and productivity gains.
  
• Lower cash balances and interest rates led to reduced interest income, affecting earnings, with continued headwinds expected in Q2.
  
• Potential disruptions from port strikes and tariffs could impact the supply chain, leading to increased costs or delayed inventory affecting revenue and profits.
  
• A slight decline in renewal rates due to growth in digital memberships could impact consistent membership fee income, affecting overall earnings stability.

Valuation

• The analysts have a consensus price target of $1024.15 for Costco Wholesale based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1175.0, and the most bearish reporting a price target of just $560.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $314.7 billion, earnings will come to $9.9 billion, and it would be trading on a PE ratio of 52.8x, assuming you use a discount rate of 5.9%.
• Given the current share price of $958.82, the analyst's price target of $1024.15 is 6.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.