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Why Costco’s Margins Could Remain Soft in 2018

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Jan. 5 2018, Updated 7:37 a.m. ET

What could hurt Costco’s margins?

Costco’s (COST) fiscal 2017 margins remained muted owing to its continued investments in growth initiatives to stay afloat amid increased competition. Similarly, margins of the company’s peers including Walmart (WMT) and Target (TGT) also took a hit from their investments in price to drive store sales.

This trend could continue in 2018 as mass merchandisers’ continued investment in their digital arms. As a result, these merchandisers aim to compete against the growing threat from Amazon (AMZN) and consumers turning to online shopping could hurt margins.

Value pricing, rising costs associated with the fulfillment of the online orders, and a growing mix of e-commerce sales to their total sales could adversely impact the margins of these companies.

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Costco’s gross margin is expected to decline on a year-over-year basis, reflecting its price investments and promotional environment. However, its operating margin could increase slightly, reflecting leverage from its strong sales, focus on containing costs, favorable currency rates, and savings from the co-branded credit card.

Outlook

Going forward, Costco’s margins are expected to remain muted as headwinds to its margins aren’t likely to subside in 2018. Moreover, Costco lagged Walmart and Target in terms of digital initiatives and could ramp up its e-commerce offerings, which could hurt its profit margins.

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