Why Costco Stock Rose 12% in January

What happened

Shares of retail giant Costco Wholesale (COST -1.65%) jumped 12% in January, according to data from S&P Global Market Intelligence. The company posted another month of steady performance despite inflationary pressure.

So what

Costco still sits behind behemoths Walmart and Amazon as the largest U.S. retailers, but its differentiated model and consistent performance have made it an excellent stock to own over the years.

It’s a reliable bet for comps and sales growth any time, but it outperformed itself over the past two years as loyal members increased their shopping, first for essentials at the pandemic breakout and then for cheap prices as inflation made price balloon.

That began to slow down in the 2023 fiscal first quarter (ended Nov. 20), when sales growth decelerated from double digits to single digit. Sales increased 8.1%, with a 6.6% increase in comps and a 3.7% decrease in e-commerce sales. Costco stock dipped after that report. Costco reports monthly sales, and so far since the first quarter, monthly sales growth has been in the high single digits.

That seems to be calming down investor fears about further deceleration, and generating stronger positive investor sentiment about Costco’s ability to withstand current market conditions and continue its excellent performance. It might mean the elevated growth is over, but Costco’s model is still working.

Now what

Costco offers some of the cheapest prices available anywhere, and its membership model breeds loyalty. Membership renewal rates consistently come at around 90%, and it typically adds several million new members each quarter. It’s also growing its executive membership, which costs double the price of a basic membership, and whose members account for the majority of sales. The prospect of continuing growth looks extremely compelling. Costco also opens about 25 stores annually, which is low as far as chain stores go. That slow and steady rate leaves open a long growth runway.

As for valuation, Costco stock isn’t cheap. It rarely is, but at current prices, shares are trading above their five-year average.

COST PE Ratio Chart

COST PE Ratio data by YCharts

You may want to wait for a dip to buy at a more attractive valuation. But Costco stock is a reliable winner, and it also pays a dividend. Management implied a special dividend is on the way, as well. If you’re looking for long-term growth, shares at this valuation shouldn’t scare you off. 

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.