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There wasn’t much to get excited about in Costco’s (NASDAQ: COST) fourth-quarter earnings report on Tuesday. Sales rose, but only by 1% and fell short of forecasts, while same-store sales fell by 1%. Membership fees rose 2%. Net income increased, largely as a result of a hefty, one-time tax benefit, while operating income rose about 5%.
All in all, a bit of a mix, but the real news was the way Costco stock has reacted. In after-hours trading immediately after the earnings were released – and again the next day – Costco shares barely moved at all.
This is notable, because the stock market of late has been rather punishing to many companies reporting earnings that were just a little bit disappointing. I recently highlighted how Lululemon Athletica (NASDAQ: LULU) shares got hammered after an earnings report that was, in several respects, strong. But there’s also a collective wisdom to stock markets and that collective mind clearly sees something it likes in Costco.
My take? In a retail sector that’s faced multiple challenges from price pressure to multichannel competition, Costco is a relatively unique player that offers an experience that’s hard to find elsewhere. While many retailers are seeking to be all things to all shoppers, Costco has remained pretty focused.
The reality is that not many retailers are trying to offer bulk purchases at a discount. The fact that Costco specializes in bulk purchases means it needs a lot of space. There are major barriers to entry to the membership club retail sector and that helps the established players like Costco and Wal-Mart’s (NYSE: WMT) Sam’s Club. With Costco’s latest earnings, the market seems to be saying, “Not your best work, but good enough.”
To be clear, this is not Costco’s best work and investors have noticed. The stock is about flat year-to-date, and any retailer, regardless of the state of their competition, will be concerned with even a modest decline in same-store sales. Investors should watch Costco’s future results closely to see if the slowdown seen in the fourth quarter was a trend or just a blip.
But investors should also be mindful of Costco’s overall position. The retailer could be doing better, but for a fairly mature company that operates a thriving brick-and-mortar business to a somewhat captive customer base, it appears to be doing well enough.
Over the past five years, Costco stock has more than doubled. It’s currently paying an annual dividend of $1.60. All in all, not a bad deal.
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