Costco Wholesale Shares Slump After Mixed Quarter, RBC Says to Buy on Pullback

10:16 AM, Dec 14, 2018 — Costco Wholesale (COST) shares were sinking Friday after the members-only retailer reported mixed results for its fiscal first quarter, but RBC Capital Markets said they’d be buyers of the stock on a pullback amid “healthy” growth in store traffic.

Late Thursday, Costco said sales rose 10% to $34.3 billion, but that was short of the consensus on Capital IQ for $34.6 billion. Net income rose to $1.73 per diluted share from $1.45 a share in the same period of last year. The Street’s expectation was for $1.62.

Gross margins were “a drag,” RBC analyst Scot Ciccarelli said in a note Friday, but the sales were “robust.” Shares of the retailer were down more than 6% in morning trading.

“Costco’s email marketing strategy along with service offerings such as Hot Buys and Buyer’s Picks continue to buoy comps (both online and in-store),” the analyst said. “We continue to expect growth in both channels to remain robust.”

Comparable sales in the 12 weeks through Nov. 25 excluding the effects of foreign exchange and gasoline prices as well as an accounting change, rose 7.5% for the total company and were up about 26% for e-commcerce. RBC said gross margins on total revenue were down 50 basis points year-on-year to about 12.7% against the bank’s 13.2% estimate, “primarily driven by Costco’s ongoing investments in its value proposition.” Traffic was up 5.2% in the US and 4.9% globally, Ciccarelli said.

Still, the analyst lowered his price target on Costco’s stock to $247 from $254, while keeping an outperform rating, after cutting his full-year 2019 earnings estimate amid “slightly more margin pressure than anticipated.” RBC is projecting EPS of $7.65, down from $7.70 seen earlier, while keeping views for 2020 and 2021 at $8.35 and $9.10.

While margins are often volatile and “came in a touch below expectations, Costco always invests in price/value,” Ciccarelli said. “This has allowed it to build a massive competitive barrier and drive some of the highest comp growth in retail, despite its massive size. We would be aggressive buyers on a pullback.”

Companies: Costco Wholesale Corporation
Price: 211.99 Price Change: -14.52 Percent Change: -6.41

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