Some investors are overly concerned about Costco’s slight slowdown in renewal rates.
But the company is growing sales and profits, and membership renewal rates in North America are still at a very high 92%.
While Costco is still on track for continued growth, the latest decline in the stock price has created a buying opportunity.
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Costco(NASDAQ: COST) has been a favorite stock of many investors for years, but over the past 12 months, the wholesaler’s shares have fallen 10%. Part of the reason for the decline could be fueled by investors reallocating their money toward higher-growth areas of the market, such as artificial intelligence stocks, while others are concerned about Costco’s falling renewal rates.
What’s happening with Costco stock right now and is the latest stock price pullback a good buying opportunity? Here’s what you need to know.
Image source: Getty Images.
Some investors have become concerned lately that Costco’s growth hasn’t been as impressive as in the past, and that the company’s (still fantastic) renewal rates for some members are slowing more than they traditionally have.
For example, a Roth Capital analyst recently said that Costco’s member signups in the most recent quarter were just 400,000, compared to a typical membership of a million.
Costco management said during the first-quarter earnings conference call that while membership numbers were lower, that was largely due to Costco’s younger shoppers who subscribe online and tend to renew at a slower pace. This could persist for a few more quarters, according to CFO Gary Millerchip:
“Our goal is to continue to improve renewal rates by improving engagement among members who signed up digitally. Although, for the reasons discussed above, we may still see a slight decline in the overall renewal rate over the coming quarters.
It’s worth noting a few key facts from Costco’s first quarter as a reminder of just how strong the company’s performance has been, despite the stock’s underperformance. Here are some of the highlights:
Costco reported earnings per share of $4.50, beating Wall Street’s consensus estimate of $4.27.
Revenue rose 8% to $67.3 billion, also beating analysts’ consensus estimate of $67.1 billion.
Comparable sales increased 5.9% in the United States and 6.4% overall.
Costco’s Black Friday sales set a record of more than $250 million in non-food orders.
These are all impressive results, and they indicate that many investors aren’t seeing the bigger picture: Costco continues to grow at an impressive rate. In addition to all of the above, the company also increased its digital sales by 20.5% during the quarter, its site traffic increased by 24%, and its mobile app traffic jumped by 48%.
As I mentioned earlier, the company’s membership renewal rates remain very impressive, although slightly lower than in recent years. Costco has 81.4 million paying members, an increase of 5.2% from last year’s quarter, and renewal rates in North America were 92.2%, down slightly from its average of 93%.
It’s a bit surprising that some investors have clung to slightly lower renewal rates while overlooking the fact that renewal rates are still enviable by any measure and quarterly results are excellent on almost every metric.
While it’s not great to see Costco’s stock price falling right now, the good news is that it creates a new buying opportunity for investors who recognize that Costco continues to successfully grow its sales and profits and continues to build strong customer loyalty.
Even though the next few quarters will be a bit volatile for Costco stock, nothing has fundamentally changed for the company over the past year that should cause serious concerns about its continued growth. For long-term investors, Costco stock appears to be a good buy at a discount price.
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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool holds positions at and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
1 Growth Stocks Down 10% to Buy Now was originally published by The Motley Fool
