Costco Wholesale stock is falling Friday, despite a better-than-expected fiscal-fourth quarter from the discounter.
Where we were: Costco, always a steady performer, easily outperformed the market and its retail peers this year.
Where we're headed: Higher again eventually, if history and analysts' opinion are any indication.
In the past decade, Costco (COST) stock has been a fairly steady performer: A quick look at its chart shows that the shares barely blinked during the Great Recession, and powered through pessimism that gripped much of retail in 2016 and 2017. This year, it's jumped 24.5%, three times the gain in the SPDR S&P Retail ETF (XRT).
Of course, with great performance comes with great expectations, so there were some concerns going into Costco's fourth-quarter earnings report. Yet the company was able to beat even that high bar, reporting earnings of $2.36 a share on revenue of $44.41 billion, while analysts were expecting EPS of $2.34 on revenue of $44.17 billion.
So why the selloff? Costco also warned it found a flaw in its accounting, and thus "expects to report a material weakness in internal control" in its upcoming 10K filing.
However analysts aren't much troubled by the disclosure, focusing mostly on another strong quarter from Costco. That's really not much of a surprise either: This isn't a company like General Electric (GE), where financial restatements are just one issue amid a laundry list of missteps, or Petroleo Brasileiro (PBR), where financial chicanery goes hand-in-hand with corruption. Costco's management has a long track record of steady execution, making the news much less worrisome than it would be from a weaker company.
As for the quarter itself, there seemed to be plenty of optimism, even as the Street positions itself for growth to be a bit more modest going forward.
Cowen & Co.'s Oliver Chen reiterated an Outperform rating and $242 price target on the shares, writing that he is "impressed COST continues to drive some of the strongest comps in retail (+9.5%) led by both traffic (+4.9%) and basket [size] (+4.4%), while also encouragingly taking steps to solidify its e-commerce business," which rose 26% in the quarter. While gross margins are a headwind, he notes that core margins are better than feared, and management also outlined its plan to offset issues stemming from tariffs.
Telsey Advisory Group's Joseph Feldman reiterated an Outperform rating and $250 price target on the shares writing that although he expected an even stronger fourth quarter, he was still "satisfied with the overall performance." He notes that the company continues to make "strategic pivots" to fresh food, natural and organic items, and targeted and digital marketing "to enhance its model and drive growth," leading him to believe the company remains a market share gainer.
In addition, Moody's Investor Service also upgraded Costco's debt, to Aa3 from A1, as the agency highlighted its expanding membership, proven business model, and resonance with consumers. "Today's rating action recognizes Costco's position as one of the top performers in all of global retail, with its superior execution ability resulting in a quantitative credit profile that leads the rated retail universe," writes analyst Charlie O'Shea.
Still, not everyone was impressed. Jefferies' Christopher Mandeville initiated coverage with a Hold rating on the stock, writing that the quarter outlines the challenges ahead for Costco. He's concerned about ongoing gross margin pressure, especially as Costco invests in the business, at a time when valuation has also climbed, and prefers BJ's Wholesale Club (BJ) as a way to have exposure to the growth in warehouse discounters.
Costco is down 2.9% to $225.03 this morning.
Jefferies isn't the only firm concerned about Costco's valuation.
However others see plenty of runway for growth ahead.