Costco Stock Price Run Fails to Match Solid Comps History

Costco Wholesale Corporation COST maintained solid comparable-store sales (comps) trend amid a tough retail landscape. Major chains are grappling with sluggish store and mall traffic as consumers switch to online shopping. But Costco seems somewhat resilient to the challenging retail backdrop. However, the company’s solid comps history and sound fundamentals are not reflected in the share price.

In the past six months, the stock has declined 6.5%, underperforming the industry’s marginal gain of 1.4%. Notably, shares of Costco were hit hard, following the news of Whole Foods Market buyout by Amazon.com Inc. AMZN. Further, despite reporting better-than-expected in the fourth quarter of fiscal 2017, investors remained concerned about the contraction in gross margin (down 15 basis points) and marginal decline in membership renewal rates that may continue for at least a quarter or two. This is likely to hurt the bottom line.

Ever since, this Zacks Rank #3 (Hold) company has reported fourth quarter financial numbers on Oct 5, the stock has declined 5.5%.

Nevertheless, we believe these are short-term deterrents, as Costco remains quite disciplined in its approach to adapt to the changing retail landscape. The company’s sound fundamentals have helped to it post solid comps.

Sturdy Comps Performance

Comps for five-week ended Oct 1, 2017 increased 8.9%, following an increase of 7.3% in August, 6.2% in July, 6% in June, 4.1% in May, 3% in April, 6% in March, 4% in February and 7% in January. The company generated net sales of $12.40 billion in September, up 12.1% year over year. Notably, net sales increased 10%, 8.8%, 7%, 7%, 5%, 9%, 8% and 9% in August, July, June, May, April, March, February and January, respectively. Comparable e-commerce sales for the month of September surged 30%.

Dominant Warehouse Retailer

We believe that Costco continues to be one of the dominant retail wholesalers based on the breadth and quality of merchandise offered. The company’s strategy to sell products at heavily discounted prices has helped it to remain on growth track as cash-strapped customers continue to reckon Costco as a viable option for low-cost necessities. A differentiated product range enables Costco to provide an upscale shopping experience for its members, resulting in market share gains and higher sales per square foot. Moreover, the company continues to maintain healthy membership renewal rate. It is also gradually expanding e-commerce capabilities in the United States, Canada, U.K., Mexico, Korea and Taiwan.

Two Key Picks Apart from Costco

Investors may consider better-ranked stocks such as Burlington Stores, Inc. BURL and Ross Stores, Inc. ROST both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Burlington Stores has a long-term earnings growth rate of 16.2%.

Ross Stores delivered an average positive earnings surprise of 6.3% in the trailing four quarters and has a long-term earnings growth rate of 10%.

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