Costco Wholesale Corporation (NASDAQ:COST) stock was off nearly 2% in early trading Thursday after the company reported comparable-store sales fell 2% in March. Wall Street didn’t expect sales to advance last month, but the slump was wider than the consensus 1.2% fall analysts predicted.
At the end of the day, this isn’t a make-or-break for COST stock. After all, next to Wal-Mart Stores, Inc. (NYSE:WMT), Costco is the second-largest retailer in the U.S., so it’s not going anywhere. Plus, Costco’s March sales shortfall was partially impacted by the timing of Easter this year, which gave the company one less selling day than 2014, hitting sales by an estimated 1% to 1.5%.
That said, I wouldn’t go piling into COST stock on today’s pullback, because shares actually look a little frothy at today’s prices.
Remarkable Rally Leaves COST Stock Overpriced
There’s no two ways about it: for just about every period of time you examine, COST stock returns overwhelmingly outperform the S&P 500. Year-to-date, 1-, 5, 10-year — you name it; Costco shareholders beat the market in each and every period.
The same cannot be said for WMT stock or the share price of Target Corporation (NYSE:TGT).
But remember: Past performance is not necessarily indicative of future results. And, if you tend to believe in reversion to the mean, outperformance in the past can actually forebode underperformance in the future.
COST stock currently trades at 29 times price-to-earnings, a hefty premium to P/Es of 21 and 16 for TGT and WMT, respectively. And yet Costco’s growth profile doesn’t really justify that sort of multiple. After growing earnings per share by about 18% annually in both 2012 and 2013, COST EPS flatlined in 2014 and analysts don’t see EPS growth coming within earshot of 18% in fiscal 2015 or fiscal 2016.
Moreover, two of Costco’s largest competitors, Wal-Mart and Target, each reward investors with hefty dividends around 2.5% annually. That beats the pants off of Costco’s 0.9% dividend yield, and in today’s yield-deprived environment, WMT and TGT could enjoy a slight run-up at the hands of desperate income investors.
Unfortunately, all good things must come to an end. I believe the end of Costco’s remarkable rally in the stock market is in its final chapter.
Sales growth, which was chugging along at a double-digit clip as recently as 2012, has been in the mid-single digits ever since, and analysts expect more of the same in fiscal 2015. We’re seeing this deceleration for ourselves with Costco’s March sales miss.
With consumer spending numbers recently posting their biggest decline since the dreary days of 2009, it looks like time to take your gains with COST stock.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
