Slowing Costco Sales Growth Unnerves Investors

Shares in the membership-based retailer Costco fell 4.1% on Thursday after a June sales update failed to meet Wall Street’s lofty expectations.

That continued a weeks-long slump, but it also means the stock is looking more and more like one of the chain’s hot dog deals.

Conflict-ed Earnings

The S&P 500 Consumer Staples sector tumbled more than 10% at the start of the Iran war, amid fears that consumer spending would suffer because of higher oil prices. Costco initially proved resilient, falling roughly half as much as the sector through the initial rough patch, and then it soared. The company’s business structure seemed tailor-made for the moment: Costco’s cheaper bulk sales at the heart of its membership model appeal in times of consumer stress, and its nearly 600 US gas stations allow it to capture additional earnings when fuel prices rise. By mid-May, shares hit an all-time high.

Then, investors began to sour. The US and Iran signaled they were working toward a peace deal, oil prices started sinking toward pre-conflict levels and Costco’s shares tumbled with them. There were never concerns that Costco was struggling, but some investors cashed out their gains, assuming the record valuation wouldn’t hold. After all, Costco’s high forward price-to-earnings ratio suggests much of its value is already priced in (its 42 forward p/e Thursday is well above the Consumer Staples average of 25). What did concern investors was that Costco’s growth is slowing, a view this week’s numbers appeared to validate:

• Costco’s net sales rose 10.6% in June, the slowest pace since February, after topping 14% in May.
• What remains to be seen is whether the US and Iran end hostilities, which could reignite favorable conditions. Both countries exchanged new attacks this week, but President Trump said he’s unsure if the conflict will resume. 

Do We Have a Bargain? Costco shares closed at $912.97 on Thursday, roughly 16.6% below their $1,094.32 May 19 high and the cheapest since early January. Last month, analysts at D.A. Davidson, who set a $1,000 price target on the stock, added Costco to their Best-of-Breed Bison list, which tracks high-quality companies they expect to outperform in the next five years.