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Why Did Costco Stock Fall despite Comps Growth?

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So far, Costco (COST) stock has outgrown the broader markets this year.

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Costco’s stock performance

Costco Wholesale shares have risen 44% year-to-date. Meanwhile, the S&P 500 has risen 24.4% during the same period. Costco’s outperformance is due to its industry-leading comps growth.

However, Costco stock has fallen about 2.2% this week. The stock closed nearly 1.2% lower on Thursday following its November sales numbers.

While Costco sustained the momentum in November, its growth rate wasn’t impressive. The comps growth slowed sequentially. Management blamed the timing of Thanksgiving, Black Friday, and Cyber Monday for the growth moderation. Also, technical issues with the company’s website in the US and Canada had a negative impact on the comps growth rate. Costco said that its total and comparable sales were impacted negatively by about 1%–1.5% due to the problems mentioned above.

Also, Costco’s online sales in November fell 20% due to the calendar shift in the holiday season.

Slower November comps

Costco’s comps increased 5.3% in the four weeks ending on December 1 compared to 5.7% in October and 9.2% last November. The company’s net sales rose 6.7% to $13.62 billion in November. The traffic increased 3.3%, while the ticket size rose 1.9%.

Costco’s domestic sales sustained the momentum despite tough year-over-year comparisons and high competition. In November, the US comps increased 4.8%, which reflected a 2.6% rise in traffic and an increased ticket size. Costco’s comps in the US grew by more than 5% from July to October. However, the growth moderated a bit in November due to the timing shift in the holiday season.

Meanwhile, the company’s Canadian and international comps grew 5.6% and 7.5%, respectively. Costco’s e-commerce sales fell 3.6% due to website issues in the US and Canada.

By merchandise categories, the comps rose by mid-single-digits in the food and sundries, which reflected growth in deli, freezer, and liquor. The comps in hardlines increased by low-single-digits.

Excluding the volatility in foreign exchange and gasoline prices, Costco’s overall comps rose 4.8%. The company’s US, Canadian, and international comps increased 4.3%, 5.8%, and 6.8%, respectively.

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Costco’s Q1 net sales

Besides the November sales, Costco also provided net sales data for the first quarter. The company’s net sales rose 5.6% to 36.24 billion in the first quarter. Meanwhile, the comps rose 4.7% in the first quarter. Costco’s US, Canadian, and international comps grew 4.7%, 2.9%, and 3.2%, respectively.

In comparison, Target’s (TGT) comps growth was 4.5% during the last reported quarter. Meanwhile, Walmart’s (WMT) US comps rose 3.2%. However, the comps growth for Walmart’s Sam’s Club was 0.8% during the last quarter.

Costco will announce its earnings for the first quarter of fiscal 2020 after the markets close on December 12. Analysts expect the company’s revenue and EPS growth to moderate sequentially in the first quarter, which reflects tough YoY comparisons.

Upside could be limited

We think that Costco will be among the top retailers to gain from higher retail sales this holiday season. However, the upside in the stock could be limited. The absence of a special dividend and Costco’s lofty valuation compared to Walmart and Target stock don’t make it attractive. Also, Costco lags Target and Walmart on the digital front, which could hurt its stock.

Analysts have a consensus target price of $305.38 on Costco stock. The consensus price indicates an upside of 4.2% based on its closing price of $293.10 on Thursday.

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