Costco is finally back. The warehouse retailer stock was one of just three Club names in the green in Thursday's ugly market. (Fellow defensive names Cardinal Health and Kimberly-Clark were the other two).
While off session highs, Costco's nearly 2% advance put it ever closer to its May record high of $1,094 — a far cry from just a couple of months ago when it appeared stuck below $900. But since bottoming out in mid-September, shares are up more than 19%. The rally in Costco has been driven by two things. First, there has been a rotation into safer stocks and away from the AI trade. While Thursday's obliteration of Wall Street's postelection rally was the most severe example, this has been going on to a lesser extent for weeks. Will it last? Who knows, based on the past two days in the market.
The second thing going for Costco is strong company fundamentals — the latest being October sales. It's that second point — one that is far more within management's control — that we want to dig into. For October, Costco reported net sales of $24.5 billion, a 12.6% increase from a year earlier, with comparable sales up 11.1%. Excluding gas sales and currency fluctuations, comps rose a better-than-expected 7.3%, according to Goldman Sachs analysts.
When asked earlier on "Squawk on the Street" whether Costco shares could surpass its May record, Jim confidently responded, "Yeah, we will." While the stock has been steadily rising since Sept. 16, the rally really kicked into high gear about a week later after the company reported solid fiscal 2026 fourth-quarter earnings and progress addressing slowing membership growth rates and wobbly renewal trends.
"Costco is a volume store. It's not a price store," Jim said, pointing to the retailer's use of competitive pricing to attract large numbers of customers while also generating a windfall from membership fees. "I continue to think that Costco represents great value."
Costco's gasoline business is a prime example at a time when fuel prices have been soaring due to the Iran war-driven higher cost of oil. During September's earnings call, CEO Ron Vachris said that gas had a record year. "During the fiscal year, we estimate we saved our members over $3.2 billion versus the average price at the pump in markets where we operate," Vachris said. "We also expanded 26 existing U.S. gas stations during this year at our highest volume locations to increase throughput and improve the overall member experience."
While gas is not terribly profitable, it's been key to getting more traffic into the stores because consumers heading to the pump for Costco's below-retail-priced fuel are also apt to swing inside to shop.
The stock, however, is not cheap at nearly 47 times fiscal 2027 earnings estimates. It never has been. Jim talked about how the late Charlie Munger's views on Costco's lofty price-to-earnings valuation have shaped his. "Munger said this is the only stock in his whole lexicon that he felt you have to not pay that much attention to the P/E," Jim said. "I've adopted that for a long time."
Munger, who was Warren Buffett's longtime right-hand man at Berkshire Hathaway, served on Costco's board. Munger was willing to look past the stock's premium multiple and own the stock for the long term because he believed so strongly in its business model, moat, and customer loyalty. We share that admiration, which is why we've owned Costco stock for years. But we also recognize that a high valuation means there's little room for error when the company has operational hiccups. The numbers need to be near-perfect or else its sainted status could be in question. That's why the decline in membership renewal rates stretching back to last year was so worrisome for us. But it is also why shares have reacted favorably since its fiscal Q4 earnings report showed a sequential improvement in worldwide renewal rates.
