Costco trades at 45.4 times trailing earnings just as its September 2024 membership fee increase has fully lapped. With capital spending rising to $7.5 billion and membership growth moderating to 3.8%, valuation is vulnerable to multiple contraction.
Key points
- 45.4 times trailing earnings is an excessive multiple for a retail model whose primary fee-hike tailwind has fully ended.
- $7.5 billion in planned fiscal 2027 capital spending leaves projected free cash flow essentially flat at $9.5 billion.
- $851.20 target reflects a premium 38 times fiscal 2027 earnings, implying downside as growth normalizes.
The call
Costco trades at 45.4 times trailing earnings, which requires annual earnings growth above 19% over the next two years to support the current quote. That pace demands either accelerated membership sign-ups or aggressive gross margin expansion. The market is too optimistic about Costco sustaining double-digit profit gains now that pricing levers are exhausted.
Diluted EPS and the bar implied by current price ($)- Reported EPS
- Desk forecast
Costco annual EPS history and FY27 projection. Sources: SEC Form 10-K and desk forecast.
We project fiscal 2027 earnings per share of $22.39, representing 7.9% growth. The September 2024 fee hike has fully lapped, while membership growth of 3.8% is converging toward warehouse unit growth. Costco intentionally reinvests cost savings into lower shelf prices rather than margin expansion, putting a strict structural ceiling on earnings leverage.
Valuation
| Valuation metric | Value |
|---|
| Fiscal 2026 diluted earnings per share | $20.76 |
| Fiscal 2027 estimated net revenue | $325.89 billion |
| Fiscal 2027 estimated net margin | 3.05% |
| Fiscal 2027 estimated diluted earnings per share | $22.39 |
| Target price-to-earnings multiple | 38.0 times |
| 12-month price target | $851.20 |
A 38 times multiple preserves a substantial premium over general merchandise peers, acknowledging Costco's 92% renewal rate and top-tier balance sheet. At 42.1 times forward earnings today, the multiple leaves negative asymmetry for investors as fee-driven profit growth recedes. The stock warrants a sell rating.
Risks
- Discretionary non-food demand could outpace expectations, which would appear early in monthly sales releases exceeding 9% adjusted comps.
- Accelerated digital delivery adoption through DoorDash and Uber Eats could drive higher basket sizes, visible in digital comp growth topping 25%.
- Board authorization of another large special dividend from $20.2 billion in cash could temporarily support the share multiple.
What would change my mind
A sustained reacceleration in global paid membership growth above 6% coupled with meaningful gross margin expansion would invalidate our thesis.