Costco (NASDAQ: COST) shareholders aren't used to disappointment. Over the past five years, the warehouse retailer's stock has outperformed the S&P 500 while paying billions in dividends. Costco's returns are nearly 230%, more than double the market's 100% increase since March 2021, including those payments.
For a retail stock among the least profitable in its peer group, such gains are impressive. No fast-growing tech company with double-digit operational profit margins here. Walmart gets more per dollar than Costco. Both inside and outside its consumer essentials specialty, sales grow faster. While its stock price is near a record, investors risk Wall Street disappointment. Here are the biggest reasons Costco might disappoint in 2024.
1. No fee hike Membership fees are the warehouse giant's greatest revenue stream, by far. Last quarter, Costco earned 65% of its net profits from $1.1 billion in subscriber fees. The rest came from Costco's goods markups.
That's why Wall Street is excited about another charge hike. Costco raises fees every five or six years, and it's been seven years since the last one. The next one may not arrive in 2024. Management claimed in a conference call that no raise plans are in place as of early March. If another year goes without this cash flow and earnings boost, investors will be disappointed.
2. Low profits Rock-bottom profitability numbers show Costco's price-leadership selling strategy. Today's gross profit margin is 12%, compared to Walmart and Target's 25%. Operating profit margin, at 3% of revenues, is also low for the warehouse giant.
Costco may face higher investor demands in 2024 and beyond. Increasing e-commerce sales are helping Walmart reach 5% profits. Recently, gold bars and gift cards have helped Costco flourish in this segment. Wall Street hopes Costco can boost its profit margin, but it's likely to keep reinvesting in its low prices.
3. Weaker renewals Most shops measure customer traffic, whereas Costco investors use renewal rates to measure shopper engagement. This rate is rising, driving the chain into record territory. Today, 93% of members renew.
They're fighting for these shoppers. Walmart reported that higher-income grocery shoppers are driving its growth in its recent earnings call. After its consumer discretionary division tanked last year, Target is trying hard to rebuild it. If rivals steal Costco customers, lowering its renewal rate, the stock could fall in 2024.
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