Costco (COST) earnings topped Wall Street estimates for the first time in five quarters Wednesday, but Costco stock has already discounted the good news — and then some.
Costco earnings came in strong despite the drop in gas prices, thanks to robust back-to-school sales and an increase in membership fees. As a result, Costco stock rallied some 2% by midday.
The better-than-expected performance offers investors in the sector a brief respite from a dismal year for retail stocks. The slow-growth recovery and stagnant wages have consumers being very tight with their discretionary dollars.
Indeed, it has been so tough that even names that should do well in a weak economy are languishing. Discount giant Walmart (WMT) is flat for the year-to-date, while the Retail SPDR ETF (XRT) is off almost 3%.
Costco stock actually was lagging the broader market for the year-to-date until recently, and it’s still underperforming the S&P 500 by a wide margin over the last two years. A late summer upturn for Costco stock and a slumping S&P 500 now have the wholesale club matching the market’s performance. Even then, Costco is only good for a year-to-date total return of 6.2%.
Results from the most recent quarter might just change that.
Costco Earnings Beat by a Wide Margin
Costco earnings rose to $697 million, or $1.58 a share, from $617 million, or $1.40 a share, a year ago. Analysts polled by Thomson Reuters forecast Costco earnings to come in at $1.52 a share.
That’s a big earnings beat.
Revenue increased 9.3% to $35.52 billion, which was slightly ahead of analysts’ average forecast. Revenue from membership fees rose 7.3% to $768 million, and same-store sales — a key measure of a retailer’s health — gained 7%, excluding fuel sales.
But while this was the best quarterly showing for Costco earnings in more than a year, Costco stock has more than baked in better days ahead for the retailer.
On a forward basis, Costco stock goes for more than 25 times earnings, but its growth forecast is only 10% a year. By that measure, Costco stock is pricey — and very expensive compared to the broader market, which isn’t exactly cheap these days.
True, as the more “upscale” warehouse club, Costco stock usually gets a premium valuation, but even by its own standards, it’s too rich. Over the last half-decade, Costco stock has an average forward price-to-earnings multiple (P/E) of less than 22.
Multiples tend to revert to the mean over time, so at some point multiple compression will be a concern for Costco stock.
Bottom Line
Costco earnings do portend better times ahead for retailers. Back-to-school sales were solid, and were led by apparel, which has been a category laggard.
As for Costco stock itself, this is a hold at best. It’s simply too pricey at current levels to bother with.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
