This store stock is a better buying opportunity than Costco


[Note: Costco fiscal year ends in August]

We believe that Five Below’s (NASDAQ
) is currently better rated than Costco’s stock (NASDAQ: CHARGES). Costco’s current price-to-EBIT ratio of 29x is above levels of 20x
for five below
. So does this gap in valuation make sense? We don’t think so, especially when we look at the fundamentals. More specifically, we arrive at our conclusion by looking at historical trends in revenue and operating profit for these companies. Our dashboard Better bet than COST: Pay less to get more from FIVE has more details – parts of which are summarized below.

1. Revenue Growth

In today’s inflationary environment, consumers are undoubtedly trying to increase their budget and look for value above all else. With this in mind, it’s no surprise that companies like Costco and Five Below are becoming attractive to investors. Let’s compare the earnings for both companies. Costco’s revenue grew an average of 12% over the past three years, compared to Five Below’s revenue growth of 23%. And if we look at revenue growth over the past 12 months, Five Below’s 23% revenue growth was again ahead of Costco’s revenue growth of 17%.

  • Costco is a warehouse club operator. The company collects fees from its members and sells items in bulk at rock bottom prices, while deriving most of its operating margin from these membership fees. In its fiscal third quarter (ending May 8), Costco generated net sales of $51.6 billion, up 16.3% year over year (yoy). Compared to Costco’s compound annual growth rate of 8.2% over the past decade, the growth rate of 16.3% in the most recent quarter is quite impressive. The company’s third quarter revenue was fueled by a 5.6% increase in store frequency and a 7.6% increase in the average transaction total. Also, Costco’s membership households grew to 64.4 million, up 6% from last year in FYQ3. In addition, the renewal rate in the US grew to 92.3% and reached 90% globally – a sign of the retailer’s ability to retain new customers and attract new customers to its warehouses.
  • Five Below is a teen-focused discount company. Revenue in the last quarter (ending April 30) was up 7% yoy to $639.6 million. While this was a massive slowdown from previous quarters, it still came on top of a nearly 200% increase in revenue over the same period a year ago. Management recently released its long-term outlook, revealing that Five Below has a lot of growth potential ahead of it. By 2025, the goal is to double sales and earnings per share. And by 2030, management hopes to more than triple its store footprint to 3,500, compared to 1,225 on April 30.

2. Operating profit growth

Five Below’s operating income growth also compares favorably to Costco over the past twelve months and three years. Better sales growth for the former led to higher operating income.

The net of everything

Five Below has seen higher revenue growth and operating income than Costco over the past twelve months and three years. Still, it has a relatively lower price-to-EBIT ratio compared to Costco. This comparative underperformance in Costco’s revenue and operating income growth compared to Five Below reinforces our conclusion that COST stocks are expensive compared to FIVE. We think this difference in valuation will eventually narrow over time to favor the cheaper name.

It’s also helpful to see how his peers are doing. See how Costco’s Peers rate on metrics that matter. Other valuable comparisons for companies in different sectors can be found at Peer Comparisons.

With inflation rising and the Fed raising interest rates, Costco is down 8% this year. Can it go down even more? See how low COST stocks can go by comparing the decline in past market crashes. Here’s a performance breakdown of all stocks in past market crashes.

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