Where Will Costco Stock Be In 5 Years?

Getting more value per dollar is satisfying – and when budgets are tight, it’s a necessity. Warehouse stores like Costco, BJ’s, and Sam’s Club have figured out how to deliver low prices. They remove the frills, reduce the number of products in stock, and buy in bulk. Then, they pass the resulting savings along to consumers.

Of course, even warehouse stores have to generate a profit if they want to stay in business. That’s easy – it doesn’t come from the products sold. It comes from membership fees that consumers and businesses pay for the privilege of shopping at one of the chains.

Costco has been particularly successful at bringing members in and moving them to higher, more expensive membership tiers. Will that be enough to deliver long-term growth for shareholders? Where will Costco stock be in 5 years?

Is Costco Stock a Good Investment?

It goes without saying that smart shoppers wouldn’t bother paying for a Costco membership if they weren’t saving money on their purchases.

Fortunately, Costco has mastered the science of keeping prices low without sacrificing the health and welfare of its employees.

While competitors like Sam’s Club and BJ’s receive an endless stream of internal and external criticism for low wages, poor working conditions, and unpredictable hours, Costco has been recognized by various publications as a “Best Place to Work,” “Best Company to Work For,” “Happiest Employees,” and “Best Company Culture.”

Costco attracts top talent because it pays more across the board, beginning with its entry-level workers. It offers more full-time positions than its retail peers, who rely on the flexibility of part-time workers to remain profitable.

Full-time positions come with important benefits, including medical insurance, which are not typically available to part-time retail workers.

The combination of higher wages, reliable hours, and robust benefits creates a low-turnover environment at Costco. That’s a win for customers, who develop relationships with staff at their local store.

More importantly, when employees stick around, they gain experience and expertise that leads to greater efficiency, increased productivity, and exceptional customer service. It’s no wonder Costco members renew at an astonishing rate of 90 percent or more per year.

That renewal rate is the number one reason that Costco stock is a good investment, because Costco doesn’t make its money from selling groceries. Profits come from membership fees. But that brings up an important question. Is relying on membership fees a sustainable business model, or is Costco a risky investment?

Is Costco a Risky Investment?

It’s hard to conceive of a retailer that has little or no profit margin on the products it sells, yet Costco’s business model is deliberately designed to do just that. It cuts the prices consumers and businesses pay to the bare minimum in an effort to deliver value for the cost of the membership.

The effectiveness of this model is illustrated in Costco’s financial reports. For example, Costco shared its fiscal third-quarter 2023 results in May. Product sales came in at $52.6 billion, but the costs associated with operating the business totaled $52 billion.

Gross profit was only about $600 million. However, membership fees brought in $1 billion in revenue – and that $1 billion cost the business almost nothing. The company’s operating income for the quarter totaled $1.679 billion, and the lion’s share of that figure came from membership fees.

While a model that relies on memberships for profit seems like a high-risk proposition on the surface, it works. In fact, many consumers and businesses are willing to pay more for membership to access the store’s low prices.

The standard membership fee is $60 per year, and the Executive Membership is $120. The higher tier comes with additional benefits, including two percent cash back on purchases. Consumers have embraced the tiered structure, and both membership categories are growing.

The biggest question mark on the membership fee front is unauthorized sharing. Like its video streaming peers, Costco is “cracking down” on sharing membership cards, and shoppers will now be asked for ID at the self-checkouts.

However, though Netflix has had a lot of negative reactions – and account cancellations – as a result of its enhanced focus on reducing password-sharing, Costco isn’t expecting to lose members. After all, members have always shown ID in regular checkout lanes, and unlike Netflix, Costco has never explicitly or implicitly encouraged membership sharing.

In short, this doesn’t feel like a change in the terms of membership for Costco users, so it shouldn’t put a damper on renewal rates – and it might lead to increased membership sales. That’s good news for Costco shareholders.

Where Will Costco Stock Be In 5 Years?

Costco isn’t growing particularly quickly, but it is growing on all fronts. Five years ago, there were fewer than 52 million households with Costco memberships. Today, that figure is over 69 million households – and 124.7 million unique cardholders. Five years ago, membership fees generated $737 million in revenue. Today, that figure is more than $1 billion.

Some of that growth can be credited to increased membership at existing locations, but more of it has come with the company’s expanding footprint. Five years ago, there were approximately 750 Costco warehouse stores.

Today, there are 855. Costco has indicated that it intends to continue adding stores to its existing portfolio. At the moment, that includes locations in 46 US States and Puerto Rico, as well as stores in Australia, Canada, China, France, Iceland, Japan, Korea, Mexico, New Zealand, Spain, Sweden, Taiwan, and the United Kingdom.

Costco leadership committed to 26 new stores in fiscal 2023, which ends on the Sunday closest to August 31st. Assuming the company continues at this pace and brings in the same general number of members to each location, shareholders can count on steady, sustainable growth for the next five years.

While exact figures aren’t available, some estimates suggest that if the growth rate remains steady, in five years, the number of households participating in Costco membership programs at any level will increase to about 85 million. Related fees will bring in approximately $1.25 billion – and that’s nearly all profit if Costco remains committed to its current business model. The bottom line? Costco stock is a buy.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.