Costco Wholesale Corporation (COST Quick QuoteCOST - Free Report) continues to capture investor attention with its stellar reputation for value-driven offerings and robust financial performance. With the company recently reporting impressive October sales, the buzz around the stock has intensified. However, this enthusiasm has also reignited concerns about its lofty valuation, prompting the question: Is Costco still a smart buy?

The debate is understandable. On one hand, Costco's ability to drive consistent revenue growth and retain loyal members makes it a standout in the retail sector. On the other, its premium stock price leaves little room for upside. Let’s take a closer look at the company’s latest performance and judge whether now is the right time to invest.

Costco's October Sales Show Ongoing Demand

Costco is a prominent player in the retail industry, renowned for offering high-quality products at competitive prices. Its membership-based model fosters strong customer loyalty, while its strategy of bulk purchasing, streamlined supply-chain management and controlled markups ensure consistent value. This approach has allowed Costco to achieve steady revenue growth, even in the face of fluctuating market conditions.

For the four weeks ended Nov. 3, comparable sales in the United States grew 4.1%, while Canada and Other International markets saw increases of 8% and 7.1%, respectively. The total company comparable sales rose 5.1%. This stellar performance follows consecutive increases of 6.7% and 5% in September and August, respectively.

When adjusting for the effects of gasoline prices and foreign exchange rates, Costco’s comparable sales paint an even more impressive picture. The company’s total comparable sales, excluding these external factors, increased by 6.5% in the last month.

As a result, Costco's net sales for October increased 7.2%, reaching $20.03 billion, up from $18.68 billion in the same period last year. This follows a sales improvement of 9% and 7.1% reported in September and August, reflecting a strong and consistent sales performance in the past few months.

Growth Drivers: What’s Propelling Costco Forward?

Costco’s resilient business model, centered around a membership-based structure, continues to be a major growth driver. Members pay an annual fee for access to Costco's warehouses, where they can purchase goods at significant discounts. The company benefits from substantial recurring revenues through membership fees, with renewal rates exceeding 90% in key markets such as the United States and Canada.

The membership fees contribute significantly to Costco’s bottom line. These fees act as a buffer against margin pressures from its low-priced product offerings, allowing the company to maintain profitability while keeping costs low. The annual fees range from $65 for Gold Star, Business and Business add-on memberships to $130 for Executive memberships.

Costco continuously adapts to market trends and consumer preferences. The company regularly updates its product offerings to include a mix of everyday essentials and unique, high-demand items. Through market analysis and tailored offerings, Costco has expanded its presence, both domestically and internationally. 

The company has been steadily opening new club locations while operating e-commerce sites across various countries, including the United States, Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia. The company registered a 19.3% increase in e-commerce comparable sales in October.

Does Costco Look Pricey Post October Sales?

Costco's shares have climbed 3.4% since the release of its October sales results on Nov. 6. The stock hit a 52-week high of $962 on Nov. 8 but has since pulled back, likely due to profit-taking. At yesterday's close, Costco was trading at $930.15, 3.3% below its 52-week high. Despite this recent retreat, Costco has remained strong, up 4.9% over the past month, outpacing the industry's rise of 2.8%.

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However, with this positive momentum, questions about Costco’s valuation are becoming more pronounced. The stock is trading at a significant premium to its peers. Costco's forward 12-month price-to-earnings ratio stands at 51.36, higher than the industry’s ratio of 29.94 and the S&P 500's 22.22.

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While Costco’s fundamentals remain solid, the stock’s current valuation may leave little room for further significant gains, especially if market conditions become less favorable.

Final Thoughts on Costco

Costco's impressive sales figures are part of a larger retail picture where competition is intensifying. Rivals like Walmart (WMT Quick QuoteWMT - Free Report) , Target (TGT Quick QuoteTGT - Free Report) and BJ’s Wholesale Club (BJ Quick QuoteBJ - Free Report) , which also cater to value-conscious consumers, are investing in expanding their e-commerce capabilities and enhancing customer experience. However, Costco benefits from its membership model and bulk purchasing, which provide a significant advantage in customer retention.

With the Zacks Consensus Estimate projecting 7.4% sales growth and 10.2% earnings growth for the current fiscal year, Costco's outlook remains positive. However, the stock's premium valuation, coupled with underlying inflation and changing consumer spending habits, could limit future gains. 

For new investors, it may be prudent to wait for a more favorable entry point. Existing shareholders should consider holding their positions but remain vigilant for any signs of changing market dynamics. Costco currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.