Investing.com -- Costco Wholesale Corp (NASDAQ:COST). has been upgraded to an 'AA' rating from 'A+' by S&P Global Ratings, based on its strong performance and low leverage. The company's outlook remains stable.
The upgrade is a reflection of Costco's solid operating track record, consistent credit metrics, and the success of its membership model. Costco's memberships and warehouse sales are viewed as a single offering, and the company's large member base sees value in their memberships. As the second largest brick-and-mortar retailer in the world by revenue, Costco offers significant value to its members through lower prices and unique products, leading to strong renewal rates of over 90%.
Costco's international expansion has also been successful, with non-U.S. revenue increasing by about $30 billion or 70% compared to 2019, reaching approximately $70 billion in 2024. The company now derives about 27% of its revenue from the international market.
Despite not maintaining public targets for its credit metrics, Costco has maintained conservative credit metrics. The company's scale and strong cash conversion provide significant free cash flow, which is used to support its growth plans while also returning significant cash to its shareholders. Costco has maintained a steady pace of new store openings since 2017, with 26 stores expected to open in 2025. Rather than overextending on new stores, the company prefers to return excess capital to its shareholders via special dividends, while maintaining more than $9 billion of cash on its balance sheet.
Costco's net debt is typically near zero, and it is not expected to undertake a significant debt-funded distribution or require a large debt issuance to fund its growth strategy. The company has significant capacity to raise new debt while maintaining conservative credit metrics and S&P Global Ratings-adjusted leverage of below 1.5x.
Costco’s consistent same-store sales growth, such as 9.9% in December 2024 excluding gasoline and foreign exchange, has consistently exceeded the industry average. This is attributed to the company's appeal to value-oriented consumers, who are increasing in number due to slowing economic growth. Costco's customer base is generally higher income and therefore less exposed to the current weakness among lower-end consumers. In recent years, the company has significantly expanded its e-commerce business, which now accounts for about 10% of its sales.
Costco expanded its EBITDA margins without raising its membership fees during a period of significant inflation, and it is expected that its announced membership fee hikes will support slightly higher S&P Global Ratings-adjusted EBITDA margins. The company generated S&P Global Ratings-adjusted EBITDA margins in the 4.7%-4.8% range from 2020 to 2023, improving to 5.0% in 2024.
The membership fee increase of about 8% will contribute over $1 billion of incremental run-rate revenue at a very high margin once the cycle of renewals is complete. The company is likely to use a significant portion of the proceeds from its higher membership fees to fund its operating expenditures and provide lower prices for its members.
The rating on Costco is now the same as the rating on Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN), although these businesses are considered to be materially larger and more diversified.
The stable outlook on Costco reflects S&P Global Ratings' belief in its strong membership renewal rates, increasing margins, and positive same-store sales growth. This is expected to support the company's ability to maintain conservative credit metrics, including S&P Global Ratings-adjusted debt to EBITDA of well below 1.5x, while prioritizing internally-funded growth over M&A and returning excess cash flow to its shareholders.
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