Costco Improves Across Categories With Strong June Showing; Competition Concerns Linger

Costco Wholesale Corporation COST reported on Wednesday its monthly sales and performance metrics for June, which were impressive but not enough to turn some analysts incrementally bullish.

Wells Fargo's Zachary Fadem maintains a Market Perform rating on Costco's stock with an unchanged $170 price target as Costco's June performance came in better than expected. Specifically, total/U.S. core comps of 6.5 percent/6.3 percent were above the analyst's 4.5 percent and 4 percent estimate, respectively while traffic growth of 4 percent (4.5 percent in the U.S.) marks a continued acceleration.

Meanwhile, June's metrics showed a sequential improvement in hardlines, food/sundry and softlines while fresh food remained unchanged from May. In addition, the negative impact of deflation is subsiding with front end basket being slightly inflationary (in categories like tobacco, ancillary and e-commerce).

Why Not Bullish?

Despite June's "strong" performance, the analyst isn't moving his rating higher. The reason for this is clear: valuation.

Despite accelerating comps and traffic, Costco's stock industry high valuation of 25x NTM (next 12 months) remains a "sticking point in this market," the analyst noted. In fact, two of the major catalysts to support the stock in fiscal 2017 (member fee increase and special dividend) have now passed, which implies investor focus will shift to the "heightened concerns" around long-term competition.

Related Links:

Is Costco Finally Finished Getting Amazoned?

What Does Warren Buffett Have To Do With The Amazon-Whole Foods Merger?