Costco 'Has The Tools To Compete And Win': Analysts React To Retailer's Q2 Report

Shares of Costco Wholesale Corporation COST were trading lower by nearly 2 percent early Thursday afternoon after the company reported an earnings beat in its fiscal second quarter with revenue that fell slightly short of expectations.

Rating, Price Target Changes

• Wells Fargo's Edward Kelly maintains a Market Perform rating on Costco's stock with an unchanged $195 price target.
• Jefferies' Daniel Binder maintains a Hold rating on Costco's stock with an unchanged $186 price target.
• Baird Equity Research's Peter Benedict maintains an Outperform rating on Costco's stock with an unchanged $215 price target.
• Susquehanna Financial Group's Bill Dreher maintains a Positive rating on Costco's stock with an unchanged $230 price target.

Wells Fargo: Solid Report, But Concerns Remain

Costco's fiscal Q2 report was a "welcome event" and the results were "somewhat better than expected," Kelly said in a Wednesday note. The warehouse club showed improved membership trends from the prior quarter, along with better costs and a solid gross margin, the analyst said. 

Costco discussed its tax reinvestment plans, but was "vague" on actual details, Kelly said. It's clear some of the tax savings will flow directly and indirectly to Costco's bottom line, the analyst said. Investors can assume that two-thirds of the tax upside will be reinvested, which should help the company generate a higher return on investment than its peers, he said. 

Costco's valuation remains "high" and earnings visibility remains a "challenge" due to tough sales comparisons and a lack of specific details on tax savings, Kelly said. 

Jefferies: Lack Of Clarity On Tax Savings

Costco's earnings report should be "welcomed by investors," as renewal rates inched higher in the quarter after experiencing various degrees of "slippage" over the past two years, Binder said in a note. The membership renewal rate should move higher going forward as the company exits its credit card transition, he said. 

E-commerce sales also showed strength in the quarter and, unlike other retailers, Costco's online business is more profitable than its physical business, the analyst said.

" ... Strong e-commerce growth could be accretive if it doesn't just transfer store sales to online," Binder said. 

Perhaps the most notable aspect of Costco's report was management's lack of clarity on how it plans to use tax savings, Binder said.

Other retailers have publicly quantified how much they will invest and where, but Costco's lack of clarity increases the chance of surprise gross margin misses and increased SG&A, the analyst said. 

Related Link: Stifel Remains A Costco Bull After In-Line Q2

Baird: Not Concerned With Tax Savings

Unlike other Wall Street analysts, Baird's Benedict said he isn't concerned with Costco's tax savings plans.

The retailer will re-invest the savings back in its business in a way that's consistent with its DNA, Benedict said.

Improved pricing from vendors and ongoing vertical integration efforts could prove to be "valuable offsets" to increased spending on employees and members, the analyst said. 

Investors should expect the pace of Costco's EBIT growth to "clearly slow" from around 20 percent in the first half of fiscal 2018 as the company embarks on executing its "proven strategy," Benedict said. 

Costco's earnings report reinforces a bullish stance that the company "has the tools to compete and win in the ever-evolving omnichannel retail world," he said. 

Susquehanna: Costco Is Never Cheap 

Costco needed to report "solid" earnings, and the company certainly delivered and demonstrated again that it's "extremely Amazon resistant," Dreher said in a research report. Costco's business model of operating at an "extraordinarily low cost" with more than 50 percent of total sales in grocery implies the stock will never be cheap, he said. 

The analyst's $230 price target is based on a 27x P/E multiple, which is a premium to its historical average. The premium valuation is justified given a core customer base that is typically wealthier, with a sticky renewal rate of more than 90 percent in the U.S. and Canada and 88 percent globally, Dreher said. 

"If COST shares are down because of a sloppy tape and garbage estimates distorting consensus, it's a great buying opportunity because Costco's business is hitting on all cylinders." 

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