TLDR
- Costco shares closed at $946.11, the lowest level since late January, falling in seven of the past eight sessions.
- The decline came after third-quarter earnings showed an earnings per share loss of six cents, despite revenue beating expectations.
- Mizuho and Jefferies analysts stress that Costco’s pricing system drives member retention and sustainable traffic.
- DA Davidson has promoted Costco to its best-in-class list, highlighting the warehouse model’s enduring competitive advantages.
- Shares are trading close to 42 times forward earnings, yet Wall Street expects double-digit earnings growth for the current and upcoming fiscal years.
Costco Wholesale (COST) has been under pressure recently. Shares settled at $946.11 on Monday — the weakest close since the final days of January — after a painful stretch that saw the stock fall in seven of the previous eight sessions.
This decline represents a decline of approximately 16% from the company’s record closing price of $1,094.32, which was reached earlier this month.
Even with the economic downturn, Costco is still ahead by about 10% for the year. However, the recent weakness has ignited debate among investors: does this indicate trouble ahead or does it represent an attractive entry point?
Selling began to follow Costco The third quarter financial results were revealed last Thursday. The company’s earnings per share fell six cents below Wall Street expectations. However, on the revenue side, results beat expectations and underlying fundamentals looked strong.
Comparable store sales jumped 12% overall, with fuel sales providing significant momentum. Excluding gasoline, comparable sales rose 6.6% – marginally below analyst estimates of 6.7%.
What analysts say
Mizuho analyst David Bellinger remained unfazed by the results. He stressed that Costco’s commitment to maintaining low prices forms the cornerstone of its business model — a strategy that drives high renewal rates and consistent member visits.
Corey Tarlow, a Jefferies analyst, echoed that sentiment. “Increasing gas participation enhances member loyalty and repeat members, and supports both the companies in the near term and the strength of the ecosystem in the long term,” he wrote.
Aggressive pricing certainly creates margin pressure. But Wall Street views this as an intentional strategic choice rather than a fundamental weakness.
DA Davidson analyst Michael Baker went even further, moving up Costco To the company’s top list following the sale. He highlighted the vast competitive advantages of the warehouse club format – including high barriers to entry, curated merchandise selection, and reliable membership fee revenue.
Becker’s research reveals a compelling story. Although they represent just 5% of total US retail, warehouse clubs have expanded at a 6% annual rate since 2007 and 11% annually from 2018 onwards – significantly outpacing the broader retail and grocery sectors.
“Costco has taken share from other warehouse clubs and in retail overall, growing 9% annually since 2007,” Baker noted.
Evaluation question
Not all observers are rushing to buy. Even Baker acknowledged that evaluation is a legitimate concern. Trading at about 42 times forward earnings, COST carries a premium price tag – even after the recent decline.
Some calculations put the trailing earnings multiple close to 50 times, a number that is giving some market participants pause given the current economic uncertainty.
However, consensus forecasts on Wall Street expect double-digit earnings expansion for both the current fiscal year and the next.
Costco has also distributed $19.7 billion to shareholders through dividends over the past five years, plus another $3.2 billion through stock buybacks.
As of Monday’s close, COST’s price was trading around $949.50.
