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Costco Beats 4Q17 Estimates: Stock Still Falls

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Costco Beats 4Q17 Estimates: Stock Still Falls PART 1 OF 5

Why Costco Stock Fell despite Strong Quarter

What affected investors?

Costco Wholesale (COST) posted strong fiscal 4Q17 results on Thursday, October 5, 2017. As expected, it exceeded analysts’ estimates for both sales and earnings and reported industry-leading comparable store sales growth. However, what irked investors is the company’s sluggish margins performance. Like most of its peers, including Walmart (WMT), Kroger (KR), and Target (TGT), Costco’s margins took a hit from continued price investments in the wake of increased competition from Amazon (AMZN) and other deep discounters. Costco stock fell about 3.0% in after-hours trading.

Why Costco Stock Fell despite Strong Quarter

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Outlook

Costco continues to report steady improvement in average transactions and shopping frequency, which is expected to drive its revenue in the coming quarters. The company also benefits from increased membership fee income.

Costco has introduced a couple of online delivery services, including two-day free delivery of non-perishable items and the expansion of same-day delivery for fresh groceries through its partnership with Instacart.

Through its CostcoGrocery service, the company is offering two-day free delivery of about 500 non-perishable items on orders above $75. Initially, the service is being rolled out in the continental United States in partnership with UPS (United Parcel Service).

All these measures are projected to boost sales. However, that could adversely impact margins, which is the case for peers Target and Walmart. Increased price competition poses a further risk to margins.

YTD stock movement

Costco stock has risen 8.6% YTD (year-to-date) as of October 5, 2017. The company underperformed the benchmark index since the competitive threat of the Amazon–Whole Foods deal led some investors to dump Costco stock.

The S&P 500 Index (SPX-INDEX) has risen 14.0% since the start of the year. Walmart stock has risen 14.9%, and Target stock has fallen 19.2% YTD.

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