This Metric Shows Why Costco Is the Best Retail Stock to Own

The warehouse giant’s results continue to be impressive.

If you’re looking for a top retail stock to own, it’s hard to go wrong with Costco Wholesale (COST 0.38%). The company has consistently shown that it can do well in a variety of situations. You might assume that a retailer that has become synonymous with large, bulk purchases would struggle as consumers battle with rising costs and try to scale back on spending, but that hasn’t been the case. The business is doing well, even with inflation remaining at elevated levels.

Costco has proven time and time again that it can deliver value to shoppers. And that, in turn, has resulted in some solid results — and great returns for investors. The company has set itself apart from other retailers, and that is evident through one impressive metric.

Costco’s same-store sales were up nearly 7% last quarter

Same-store sales growth, which looks at stores open more than one year, is the metric retail investors should focus on when reviewing a company’s financial results. That figure doesn’t take into account store closures and new locations, which makes it a better indicator of how a business is doing. A company could simply open more locations and generate more revenue growth that way. But for same-store sales numbers to be rising, then existing locations would need to be growing.

Costco posted its latest results in May, and for the period ending May 12, its same-store sales growth was 6.6%. That’s impressive when you consider how it stacks up against other retailers. While the periods may be slightly different, here are how other retailers have done in their most recent quarters.

Company Most Recent Same-Store Sales Growth
Walmart (U.S.) 3.8%
Nordstrom 3.8%
Ross Stores 3%
TJX 3%
Burlington 2%
Dollar Tree 1%
Home Depot (2.8%)
Target (3.7%)
Lowe’s (4.1%)
Best Buy (6.1%)

Data source: Company filings.

There’s definitely a trend of discretionary spending being down recently, which is evidenced by the notable declines reported by home repair giants Lowe’s and Home Depot. Similarly, Target depends on discretionary spending and it posted a big drop in sales recently. But even discount retailers and dollar stores haven’t been able to keep up with Costco’s impressive same-store growth.

While this is just the most recent period of strong sales, it isn’t unusual for Costco to outperform its peers.

Investors are paying a big premium for Costco’s stock

As a result of its resounding success and continued expansion, Costco has been a go-to option for many investors. Year to date, the retail stock is up 28%. And at 52 times earnings, investors are paying a big premium for it compared to other retailers.

COST PE Ratio Chart

P/E ratio among major retailers data by YCharts

The danger with a high valuation is that there can be a long way for the stock to fall if future quarters don’t remain strong. Costco has been able to do well but the risk is that if its same-store sales growth slows down, the shares could be vulnerable to a sizable sell-off.

Should you buy Costco’s stock today?

Costco has definitely shown that its business is better and more adaptable to changing conditions than other retailers. And it’s a great long-term investment to hold because Costco still has more markets it can penetrate in the future. That means a lot more opportunities for the company to get even bigger and more profitable.

But given such an expensive valuation, it’s clear investors are anticipating a lot of future growth. That means it’s important to temper your expectations in the short term, because it could be a bumpy ride. As long as you’re OK with that, this could be a stock you can safely buy and forget about.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Best Buy, Costco Wholesale, Home Depot, Target, and Walmart. The Motley Fool recommends Lowe’s Companies and Tjx Companies. The Motley Fool has a disclosure policy.

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