Costco (COST) reported second-quarter fiscal 2014 results this morning, and Wall Street finally seems to be developing some skepticism of the warehousing giant and COST stock.
Costco earnings came to $1.05 per share on revenues of $26.31 billion, both well under last year’s figures of $1.24 per share on $24.87 billion in sales. Costco earnings also failed to meet Wall Street’s expectations — analysts were projecting profits of $1.17 per share and revenues of $26.65 billion.
Investors reacted by knocking COST stock down by 3.5% in premarket trading.
A Costco spokesman cited weaker sales and gross margin results in non-foods, weaker gross margins in fresh foods, and lower international profits due to a weakening of foreign exchange rates. Margins are an especially sticky point with Costco given its much-ballyhooed practice of paying much more livable wages than the likes of Walmart (WMT) and other competitors.
Same-store sales in the United States were up 4%, including gasoline sales. Backing out gas and negative currency exchange rates, same-store sales rose 5%, both domestically and overall.
Perhaps the most refreshing thing from the report: Weaker Costco earnings were not blamed on bad weather, as several other retailers have done recently.
It also was interesting that Costco did not publish any forward guidance. But, for the record, consensus estimates for the current quarter call for earnings of $1.14 per share on $25.92 billion in sales, and full-year expectations are for $4.84 per share on $112.84 billion in sales.
Perhaps the most disappointing thing about Thursday’s report is the fact that COST stock is slowly losing its grasp on its role as one of the better retail stories of the past couple years.
Since the market lows of 2009, Costco shares have been on a roll. From March 2009 to November 2013, COST stock rose nearly 280%.
However, revenue and gross profits were also down in the last quarter, so after several years of solid performance, this makes three quarters in a row that Coscto earnings have disappointed.
It would seem the Street is now saying, “Fool us once, shame on you. Fool us a few times, shame on us.”
Click to Enlarge As you can see from the accompanying chart, COST stock has bounced back recently, after a sharp decline between December and February. The 200-day moving average is still rising; however, the 50-day has now crossed below the 200-day, which usually does not bode well for stock performance.
Also notice the increase in volume on recent down days. Meaningful support levels on COST stock kick in around the $110 area, with the next lower support area around $105.
Another cautionary note for investors is the heavy and significant recent insider selling at Costco. Several different corporate executives sold shares of COST stock between October 2013 and January 2014 in the $116-to-$124 price range. Most of these were direct sales on the open market, and not the automatic kind, nor simply option expirations.
Given the weaker earnings lately, it would appear that COST stock could easily begin to languish behind competitors such as Walmart, Target (TGT) and even the dollar stores, such as Dollar Tree (DLTR) and Family Dollar (FDO).
Over the past year we have seen that following an earnings miss, it can take 6 or 8 weeks for retailer stocks like TGT, DLTR and FDO to rebound. Therefore, I suggest that investors would do well to put COST stock on spring break for now and look for something better until after Easter.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.