10 Oct

Costco Stock: Time to Book Profit as Growth Slows?

WRITTEN BY Amit Singh
  • Costco’s domestic sales are strong and will likely sustain the momentum. However, the overall comps are soft.
  • The stock is outperforming the broader markets by a wide margin. The stock has risen about 46% YTD.

So far, Costco (COST) stock has outperformed the broader markets by a wide margin. Costco shares have risen about 46% on a YTD (year-to-date) basis as of Wednesday. The S&P 500 has risen 16.5% during the same period.

The stock’s outperformance stems from the company’s strong performance in the domestic market. Costco’s comps in the US have grown at a stellar rate despite the heightened competitive environment. The company’s value pricing and expanded offerings continue to drive traffic despite lagging its peers on the digital front.

In August, Costco’s comps rose 6.4% in the US. The company maintained the momentum in September. However, the overall comps growth moderated sequentially, which reflected tough YoY (year-over-year) comparisons. Following moderation in the growth rate, Costco stock was trading low in the after-hours of trading on Wednesday.

Costco’s comps in September

Costco reported its sales for September on October 9. The company’s comparable sales for the five weeks ending on October 6 rose 4.2%. The growth showed a sequential deceleration. In August, the retailer’s comps increased 5.5%. The soft comps reflect tough YoY comparisons. Costco’s comps rose 8.4% in September last year.

However, Costco’s domestic sales continued to impress and increased 5.0%. Meanwhile, the comps grew 1.2% in Canada and 3.0% in other international markets. The company’s net sales increased 5.6% to $14.41 billion, while the e-commerce sales rose 17.8%.

Excluding the impacts of foreign exchange and changes in gasoline prices, Costco’s comps increased 5.6%. The comps rose 5.7% in the US, 4.5% in Canada, and 5.9% in other international markets. The company’s e-commerce sales rose 18.5%.

What’s next for Costco stock?

Moderation in Costco’s comps growth rate shouldn’t surprise anyone. The retailer has posted strong sales in the past several months. Costco faces tough YoY comps. We think that Costco’s 4.2% growth in comps on top of 8.4% growth the previous year is commendable.

Notably, the company recently posted its fourth-quarter results. Costco’s comps growth showed moderation. The company’s fourth-quarter comps rose 5.1%. Despite the slowdown, the comps growth was better than Costco’s peers. Target’s (TGT) comps rose 3.4% during the last reported quarter. Meanwhile, Walmart’s (WMT) comps in the US rose 2.8%.

We think that tough YoY comparisons could continue to limit Costco’s comps growth rate. However, the company could continue to outpace its peers based on the growth rate. Target’s comps will likely increase 3.4% in the second half of 2019. Meanwhile, Walmart’s US comps will likely increase 2.5%–3%. Costco’s comps will likely be higher than Walmart and Target.

However, Costco stock has risen 46% YTD. The upside seems limited considering the company’s high valuation. The company’s management stated that there isn’t a specific plan for a special dividend, which is discouraging.

There was optimism about Costco stock because investors expected the company to give a special dividend soon. The company’s massive cash pile and stellar financial performance strengthened the case.

Costco shares trade at a forward PE ratio of 34.0x, which is well above Target and Walmart stock. Target and Walmart stock trade at forward PE ratios of 17.4x and 23.9x, respectively.

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