Costco will be releasing its Q1 2024 results next week so I will be putting out a more detailed (and updated) note based on the company’s performance. Hence, this valuation was done using its FY 2022 results (ended 3rd September, 2023)
Assumptions
Revenue: Although comparable sales is expected to remain strong, buoyed by the resilient US. consumer, I expect the company to grow net sales by c.12.5% this fiscal year which is lower than its 5-yr average of 13.60% but substantially higher than the previous year. Lower gasoline prices and a stronger USD are short term headwinds.
Operating Costs: In the last 5 years, the Company has steadily reduced its operating expenses as a proportion of Net sales, reflecting improving cost efficiency. As a result, I expect Costco to continue to manage costs effectively. This was expressed by incorporating, for my base case, a decline for this input for the first forecast year, and leaving it constant for subsequent years.
As I indicated earlier, I will dig further into the analysis next week. For now, here is a snapshot of Costco’s fundamentals:
Conclusion
At current market price of $599, Costco is a “Buy”, with an upside of 4%. If the Company is as successful in reducing operating costs (as a percentage of Net Sales) as it did in preceding years, we could see this upside increase to about 9%.
I expect mid and large cap consumer staples to continue to provide value to investors on a risk-adjusted basis in the near term. Near term risks to outlook includes a slower than expected US growth and further decline in gasoline prices.
Thanks for reading, see you next week!
