Costco Wholesale Corporation (NASDAQ:COST) reported its fiscal second-quarter earnings on March 3. Despite beating Wall Street estimates for both revenue and earnings, COST stock was down sharply in pre-trading. On Friday, it remained down roughly 1% from Thursday’s close.
There are several reasons why the market is lashing out at COST stock despite a good quarter. I’ll delve into those shortly. Some may see this as a bad sign.
If COST can’t kick back into growth mode after quarterly earnings that beat expectations, does that mean we’re hitting the end of a decade-long growth cycle that has seen shares gain in value by over 525%? I don’t think so. From my perspective, any short-term weakness in COST stock is nothing more than a market over-reaction, and the perfect time to scoop up shares at a discount.
Costco’s Second Quarter Beats Estimates
On March 3, Costco reported its Fiscal Q2 earnings. Total revenue for the quarter was $51.94 billion, up 16% year-over-year. Earnings per share (EPS) was $2.92, a 36% YoY increase. Both numbers beat Wall Street estimates, of $51.53 billion and $2.76, respectively.
Despite the earnings and revenue beats, COST stock sank in after-hours trading. It improved on Friday, but still remains off Thursday’s close by 1%.
What’s going on? The company spiked out February numbers and there was slight slowdown in comparable sales growth during the month. The effect was more noticeable in online sales (more on that in a moment), but the numbers raised fears that inflation and interest rates might be starting to bite, with consumers tightening their spending.
I actually wrote about this issue several weeks ago. If you read that post, you’ll find a case for Costco’s unique position as a bulk goods retailer actually putting it in a position to potentially benefit from these economic factors.
Costco’s E-Commerce Gains are Slowing Significantly
One of the numbers that may have caught the market’s attention was growth in Costco’s e-commerce sales. Online sales growth during the quarter came in at an adjusted 12.6%. That would be pretty solid performance — it tops Costco’s overall revenue growth during the quarter. However, a year ago, the company’s adjusted Q2 e-commerce sales growth stood at 74.8%.
That is a stark decline in growth.
Online sales surged everywhere during the worst of the pandemic. But let’s be realistic, they were always going to come down to more reasonable levels as the country opened back up. With Costco especially, people are shopping in-person because they’re stocking up on bulk items and looking for limited-time bargains.
Neither of these activities translates well to online shopping. So it should hardly be a shock that the growth in Costco’s online sales has slowed. It’s not time to panic.
Bottom Line
COST stock may have dropped in the aftermath of its Q2 earnings report, but that doesn’t mean you should avoid it. This is a stock that has performed strongly for the past decade, and a company that just beat both earnings and revenue estimates for the quarter.
It just didn’t beat them by enough. Add in slowing e-commerce growth and concern about economic factors, and COST is feeling the impact.
That being said, this is a stock with a “A” rating in Portfolio Grader, and one that has held a consensus “overweight rating” from investment analysts for months.
In the weeks before Costco’s Q2 earnings report, I wrote that the low price of COST stock wouldn’t last long. It’s up nearly 3% since then. If you have any thoughts about adding this proven, long-tern growth performer in your portfolio, the longer you wait, the more expensive it’s going to be.
On the date of publication, Louis Navellier had a long position in COST. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
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