Nobody Told Costco About The Retail Slump

Strong third-quarter results from Costco Wholesale Corporation COST have Baird doubling down on the stock.

The firm reiterated its Outperform and $200 price target on Costco after the warehouse club reported a Q3 EPS of $1.40, beating estimates of $1.31, and comps up 5 percent.

“Looking ahead, we expect comp momentum to remain strong as compares further ease (particularly in the U.S.), food deflation abates and steep declines in tobacco are cycled,” research analyst Peter Benedict said in a Thursday note. “In addition, rising gas prices [are] translating into increased traffic to the pumps at [Costco].”

The company’s EBIT grew 15 percent in the third quarter, a pace of growth that Benedict said he expects to slow in the fourth quarter.

Membership Fees Rising

Costco is raising annual membership fees June 1 in the U.S. in Canada. For Goldstar, Business and Business Add-On memberships, it’s a $5 increase from $55 to $60.

Executive memberships are jumping from $110 to $120 per year.

Baird’s Benedict said the fee increase, the retailer’s first in six years, should help to drive growth throughout fiscal 2018.

“Our math suggests the increase will add [$250 million and $0.35] to money flow index [and] EPS over the next two years,” the analyst said.

“While not all of the incremental MFI will flow through to the bottom line, the increase provides Costco a valuable tool to use as it executes its strategy of driving loyalty [and] sales.”

Growth At Costco.com

Costco’s 11-percent online growth “lags many retail peers,” Benedict said, but added that the wholesaler is improving its online experience.

The company’s website “has historically been an underwhelming online experience,” he said.

Costco is filling online orders from 19 depots today, up from seven previously, which has speeded delivery and lowered the retailer’s costs, the analyst said.

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