Shares of Costco Wholesale $COST dropped 6.8% on Friday after the company revealed worse-than-expected earnings report. The company earned $1.61 per share during its first quarter, which was worse than Refinitiv’s estimates of $1.62 per share by a penny. After that, Costco stock has plummeted another 11% in the two trading days. At the same time, Costco beat the Wall Street estimates of $34.8 billion with the revenue of $35.1 billion.
Investors are worried about some pressure Costco is facing now. However, it could be just a great opportunity to invest in $COST.
Lately, Costco is getting more competitors, such as Amazon’s Whole Foods and Walmart’s Sam’s Club. Costco’s stock is up 21.7 percent from the year, holding its own against those retail giants, whose market values dwarf the wholesaler’s $99.3 billion.
“There’s been a little bit more retail competitive pressure out there, not only from supermarkets but Sam’s as well. We’ve got good fresh sales numbers, but we — like others — our competitors are working in a little lower margin,” CFO Richard Galanti said during the quarterly conference call Thursday.
Costco Wholesale has been on a roll for the past two years, reporting a string of enviable sales gains. This culminated in a stellar 8.5% adjusted comp sales increase for the retail month of November. Sales trends have been even stronger in the U.S., where adjusted comp sales rose 10.1% last month.
However, half of the value decline was provoked by inflation of petrol and revenue recognition changes. From the expenses perspective, operating expenses had the same temp of growth as sales growth, which had a huge impact because Costco also handed out big salary increases earlier this year.
Costco typically generates the big part of its revenue from membership fees. Last quarter membership fee income rose 9.5% year over year to $758 million. Costco members are extremely loyal. In the U.S. and Canada, the renewal rate is more than 90%.
Members renew year after year because they trust Costco to offer the lowest possible prices. This commitment means that from time to time, the warehouse club giant faces margin pressure as it absorbs cost increases for one product or another.
However, investors shouldn’t confuse this with a lack of pricing power. Over a period of decades, Costco has demonstrated that it can raise prices when it is necessary.
Costco’s strong sales growth, remarkable member loyalty, massive global growth opportunities, and steady profitability all support a premium valuation for Costco stock. That also shows that the recent downtrend in gross margin won’t last forever. After their recent pullback, the shares are more affordable than they have been in quite a while. Costco stock currently trades for about 26 times the company’s projected fiscal 2019 EPS.
Analysts from JPMorgan – the largest bank in the United States, and the second largest bank in the world by total assets – think that investors should buy the $COST.
“We share the pain of the 8% stock pullback, and acknowledge that our core margin estimates were too high,” Christopher Horvers “We’ve seen this before and we will write this note again before we want to.”
When it turns around – and assuming that sales and membership trends remain strong – Costco stock could recover quickly.