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Costco’s Sales Fell in April, Is the Stock Still a Buy?

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The COVID-19 pandemic didn’t even spare Costco Wholesale (NASDAQ:COST). The company’s net sales fell by 1.8% YoY (year-over-year) to $11.39 billion for the retail month of April, which ended May 3. The company’s comparable sales declined by 4.7% in April. Social distancing restrictions and stay-at-home orders amid COVID-19 led to lower traffic at Costco. The company’s sales were also impacted by lower gasoline prices.

An 85.7% rise in e-commerce comparable sales in April wasn’t enough to offset the lower store sales. Excluding the impact of gasoline prices and foreign currency fluctuations, the company’s April comparable sales declined by 0.5%.

Costco stock has fallen by 1.0% as of 10:51 AM ET today. As of Wednesday, the stock had risen 5.1% year-to-date. In comparison, Walmart (NYSE:WMT) and Kroger (NYSE:KR) stocks have risen by 3.8% and 13.1%, respectively. So far, Target (NYSE:TGT) stock has declined by 11.4% in 2020. In March, Target withdrew its forecast for the first quarter and fiscal 2020 due to the uncertainty amid the pandemic.

Costco’s comparable sales rose 9.6% in March. Excluding the impact of gasoline prices and currency headwinds, the company’s comparable sales grew 12.3% in March. The company’s March sales gained from stockpiling and panic buying due to COVID-19 fears.

Costco’s April sales declined in the US and beyond

Costco’s US comparable sales declined 3.3% YoY in April. Likewise, the comparable sales in Canada and Other International segments declined 11.7% and 4.6%, respectively. Aside from social-distancing and stay-at-home orders amid the pandemic, Costco also blamed mandatory closures for the lower sales.

Limited service in Costco’s travel and food courts and closing most of the company’s optical, hearing aid, and photo departments dragged down the sales. In terms of merchandise categories, the company’s comparable sales in food and sundries grew by mid-teens (excluding currency fluctuations). Hardlines’ comparable sales grew low-single digits. However, the comparables sales of the softlines category fell by the low 20s. In particular, the sales of luggage, apparel, and jewelry fell.

Looking at Costco’s April sales, customers aren’t buying as much food and essential products as they did in March.

Strong retail player

Costco’s sales decline in April is disappointing. However, the decline might be temporary due to COVID-19 related issues.

Ignoring April’s performance, Costco has been generating stronger sales compared to its peers. In the second quarter of fiscal 2020, the company’s net sales grew by 10.5%. Costco’s comparable sales growth was 8.9%. However, the fiscal second quarter, which ended on February 15, didn’t involve any significant headwinds due to the pandemic.

Meanwhile, Costco has taken several initiatives to improve its performance. The company is also enhancing its e-commerce channel because more customers are shopping online. In the 35 weeks ending May 3, the company’s e-commerce comparable sales grew 29.4%.

Costco sells its merchandise at low margins. The company derives a significant portion of its profits from memberships. In the fiscal second quarter, the company’s membership fees increased over 6% YoY to $816 million. The company had 55.3 million paid members at the end of the fiscal second quarter. Also, member renewal rates were 91% in the US and 88% worldwide.

Should you buy the stock?

Despite the advantages, Costco’s high valuation multiple compared to its peers is a concern. As of May 6, Costco was trading at a 12-month forward PE ratio of 33.8x. In comparison, Walmart, Target, and Kroger were trading at forward PE ratios of 23.9x, 20.2x, and 13.1x, respectively.

The 12-month target price for Costco stock is $323.04. The target price implies that analysts on average see a 5% upside in the stock. Despite the high valuation, most of the analysts covering Costco stock have a bullish stance. Notably, 19 out of 31 analysts recommend a “buy,” 11 recommend a “hold,” and one recommends a “sell.”

Costco stock is a good bet over the long term. Investors who are ready to look beyond the short-term disruption amid COVID-19 could consider Costco.

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