Analysts Reset Costco Share Price Targets Amid New Consumer Trends

from Costco (COST) harvest day is yet to come, with higher earnings anticipated this holiday season.

Adobe recently estimated that U.S. online sales will reach $240.8 billion during the 2024 holiday season, marking an 8.4 percent year-over-year increase, according to a September 25 report from thefly.com.

The increase signals a resurgence in consumer confidence as the U.S. economic outlook strengthens, which is expected to benefit major retailers such as Walmart. (WMT) and Costco.

The latest data on personal consumption expenditures (PCE), the Fed’s preferred measure of inflation, rose 0.1% in August, bringing the annual inflation rate to 2.2% from 2.5% in July. With the Fed’s inflation target set at 2%, this decline reinforces the view that the US economic landscape is stabilizing.

Costco has bolstered its resilience by lowering prices, which resonates with rivals like Walmart and Target (TGT) .

Related: Analysts revise stock price target objective ahead of earnings

“Our goal is to always be the first to lower prices where we see opportunities to do so,” Chief Financial Officer Gary Millerchip said during the earnings call. He cited Costco’s Kirkland Signature Boneless Chicken Tenders, where a 13 percent price reduction resulted in a 21 percent increase in pounds sold.

Costco unveils new trends for shoppers

Costco posted a decline in earnings and a slight revenue miss for its fiscal fourth quarter, sending shares down less than 2% on Sept. 27, indicating that investors continue to believe in the retailer’s potential.

The company earned $5.29 per share for the quarter ended Sept. 1, beating analysts’ expectations of $5.08 per share. However, revenue was $79.7 billion. The consensus estimate was $79.9 billion.

Same-store sales, a key measure for retailers, rose 5.4 percent from a year ago, but missed estimates for a 5.7 percent increase. Same-store sales compare the results of stores that have been open for more than a year.

Costco sees two patterns among customers.

Shoppers resume spending on non-food items. “We’ve seen inflation dissipate and our members start spending more on non-food,” Millerchip said in the company’s earnings call, saying “non-food led the way with the highest comparable sales in Q4.” .

Costco is seeing more younger customers. The proof is the increase in annual membership fees among this group. A good measure for the future, it signals a sustainable increase in profit from membership fees.

Related: Analysts Reset Costco Share Price Targets Ahead of Earnings

“We ended the fourth quarter with 76.2 million paying household members, up 7.3% from last year, and 136.8 million cardholders, up 7% from last year. About half of new member enrollments in fiscal year 2024 were under the age of 40,” Millerchip said. “This percentage has increased since Covid and the average age of our members has decreased in recent years.”

Costco’s membership revenue reached $4.8 billion for fiscal 2024, up 5.4 percent from fiscal 2023. The company raised its membership fees effective Sept. 1, its first increase since 2017. But the new tax structure contributed only a small part to the growth.

Analysts raise price target on Costco shares after earnings

At least nine analysts raised their price target on Costco shares after earnings.

DA Davidson raised its price target on Costco to $880 from $780, while maintaining a neutral rating, citing “mixed” fourth-quarter results.

“The company’s membership fee revenue growth was slightly below consensus, although the growth rate remains solid and its overall gross margins were better than expected,” the analyst told investors in a research note issued by thefly. com. But the report added that Costco’s offering continues to resonate with consumers.

Truist raised its price target on Costco to $909 from $873 and maintains a hold rating.

The analyst says its Q4 results were “strong” as sales remain robust and the stacked growth rate is the strongest and most consistent of the company’s coverage. However, the analyst cautions that Costco’s valuation is still “extremely stretched.”

The late Charlie Munger, Warren Buffett’s right-hand man, was a Costco executive for more than 25 years. He also warned about Costco’s expensive price-earnings multiple. “The problem with Costco is that the earnings are 40 times. But other than that, it’s a pretty damn perfect company,” he said in 2023. (Yahoo Finance pegged the long-term current multiple at 50.25 as of Sept. 27. Its trailing 12-month price was 53.48 .)

Loop Capital analyst Laura Champine raised Costco’s price target to $1,005 from $975 and maintains a buy rating.

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Champine notes that Costco is driving significant customer traffic to its shopping clubs without a significant drop in renewal rates despite the fee increase.

Additionally, Costco’s e-commerce is showing robust growth, with a 20% increase in core sales, particularly in categories such as appliances and home furnishings, which Loop Capital suggests are nearing a cyclical low.

Costco fell 1.75% to $885.62 on September 27. Shares are up 34.2% year to date, while the S&P 500 is up 20.3%.

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