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Costco Wholesale’s (NASDAQ: COST) quarterly earnings report Thursday comes amid a flood of releases during this earnings season for retailers. For the past several years, Costco was a stock market darling, and the premier growth stock in the big-box retail space.
But Costco’s momentum has been halted, at least for now. One of its key metrics came in below analyst expectations, due mostly to lower gas prices and the effect of the rising U.S. dollar in the past year. Costco shares fell 2% after the earnings report, and the stock is down 5% year-to-date.
Costco’s Momentum Is Out of Gas
For the fiscal second quarter, Costco earned $1.24 per share in profit. That came in below analyst expectations, which called for $1.28 per share. Total sales came in at $28.42 billion, roughly even with analyst forecasts.
However, more concerning was that Costco’s comparable store sales—a critical metric for retailers that evaluates sales at stores open at least one year—rose just 1% year over year.
The key culprits for this were lower gas prices, which is a significant driver of Costco’s sales, as well as the rising U.S. dollar. Costco’s earnings per share fell 8% last quarter, while its international comparable sales declined 8% as well, year over year.
Costco shares have fallen since the start of the year, but investors should not be overly concerned by the negative headlines.
Costco Earnings: Not All Bad News
Costco shares immediately fell 4% Thursday at the open after the earnings news, although the stock gradually retraced its losses and was down less than 1% by the end of the trading session. Investors seemed to feel more comfortable with Costco’s results as the day went on; some bits of good news also emerged in the report.
First, Costco’s comparable sales, while disappointing, grew nevertheless. In a challenging environment for retail, this in itself is a notable achievement. Last quarter was the first in the past four in which Costco grew comparable sales.
Moreover, if you exclude the effects of gasoline price deflation and foreign exchange, Costco’s comparable sales would have increased 5% year over year. That is a very healthy growth rate that is far ahead of Costco’s major competitors like Wal-Mart (NYSE: WMT).
Next, Costco once again saw very strong results from its highly popular membership program, which is the major driver of its traffic and sales. Membership grew 3.6% year over year, which was ahead of most analysts’ projections. This bodes well for Costco’s brand and future growth.
Is Costco Stock a Buy?
Costco is a great brand and enjoys a solid reputation with consumers. Its growth is being fueled by e-commerce and its strong membership program. Whether the stock is a buy, however, is a different story.
Costco stock has long been viewed as a growth stock ,which has resulted in a valuation multiple befitting a growth stock. Costco shares trade for 28 times earnings, a multiple that is well above the market valuation as well as many in Costco’s peer group, including Wal-Mart. For example, the S&P 500 trades for approximately 20 times earnings.
In order for Costco stock to rally even higher, the company will need to produce much stronger growth in future quarters. Given its mediocre results last quarter, there is no guarantee that will happen. While existing shareholders have plenty of reason to hold Costco, investors looking to buy the stock right now may want to wait for a more meaningful decline in the stock price before jumping in.
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