Costco's Traffic Strength Underpins Value Strategy, But Margin Pressure and Rich Valuation Keep Us on the Sidelines

What happened

A recent Zacks article highlights Costco's growing traffic and comparable sales as proof of its value strategy, but the latest filings reveal a more nuanced picture. While ex-gas/FX comps remained solid at 6.6% in Q3 and 8.0% in May, and membership renewal rates stayed high at 92.2% in U.S./Canada, gross margin slipped to 11.04% from 11.25% a year ago, partly due to faster-growing but lower-margin digital sales. Meanwhile, the Sept. 2024 fee hike contributed roughly 35% of membership fee growth year-to-date, signaling a deceleration as that tailwind laps. At $974.8, the stock trades at 49x trailing P/E and 31.5x EV/EBITDA, leaving little room for error. We maintain our WAIT stance, preferring to see margin stabilization and sustained comps above 6% before considering entry.

Implication

Costco’s strong traffic and membership renewal rates support the business model, but margin compression from digital expansion and the fading fee-hike tailwind, combined with a rich multiple (49x P/E), limit upside. Investors should wait for either a pullback to ~$875 or proof that gross margin can stabilize near 11% while ex-gas/FX comps remain above 6%.

Thesis delta

The narrative remains centered on Costco's defensive growth, but the Zacks article overemphasizes positive traffic without acknowledging the margin erosion from digital. The report reveals that digital comps are dilutive to overall margin, and the fee hike contribution is waning. Thus, the thesis shifts from 'buy the strength' to 'wait for evidence that margin can hold.'