Costco Defenders Come Out After Stock Downgrade

Bernstein analyst Brandon Fletcher presented "compelling" evidence to support his downgrade of Costco Wholesale Corporation COST, but the analyst may have overlooked one major aspect of the business, according to CNBC's Jim Cramer.

Cramer: Costco Has Final Say In Its Destiny

Fletcher argued that Costco's stock is overvalued by nearly every financial metric, which gives the impression the company has no control "over its own destiny," Cramer said during his daily "Mad Money" show Thursday.

Costco is a best-in-breed retailer, and if it needs to shake up its business a bit, that's "exactly what they will do," Cramer said. 

Costco has a reputation of fixing past errors, such as initially ignoring the natural and organic fad, the CNBC host said. 

After realizing it was a mistake, the warehouse club "went all in," and the case can be made it that it boasts the best selection in the world, he said. 

Costco's debut in China was so successful that its Shanghai store had to close early because it couldn't handle the massive crowd, Cramer said, adding that the company decided within days to open a second location in the city.

"That sure doesn't seem like a troubled, cannibalized business to me." 

Related Link: 6 Reasons Why Costco Is Dominating A Difficult Retail Market

Gordon Haskett: 7 Takeaways From CFO Chat

Gordon Haskett analyst Chuck Grom met with Costco CFO Richard Galanti and Senior VP Financial Planning/IR/Treasury Bob Nelson. 

The main takeaway from the chat: the company will emphasize data mining and create more personalized relationships with its "very loyal" base, which stands at 97.2 million card holders, the analyst said in a Friday note. 

"In our view, the opportunity set here is immense given the data that Costco has at its disposal to drive customer engagement," Grom said. 

Gordon Haskett upgraded Costco from Hold to Accumulate with a $330 price target. 

The other highlights from Grom's conversation with Costco execs include:

1. Costco's membership base in Shanghai is already north of 180,000, with a second store expected to open in 16-18 months. The company sees an opportunity for seven openings within five years.

2. Costco is exploring an expansion into one or two Western European countries over the next few years, along with new Nordic countries. An estimated 22 new stores are likely to be opened each year, and the total store count will hit 900 within five years.

3. Online sales have an opportunity to continue growing, as e-commerce accounted for less than 5% of total sales in fiscal 2019. Other initiatives in the online space, including member e-mails and app usage, are "gaining steam."

4. Costco continues to vertically integrate some of its business,  shifting production to generate better gross margins and ensure better availability of products.

5. Management said tariffs are "manageable," and the research firm estimates unfavorable tariffs will result in a "fairly modest" impact of "a few basis points."

6. Special dividends to shareholders remain an "effective" tool, but will be offered at a less predictable rate than in the past.

Costco shares were up 0.27% at the time of publication Friday. 

Related Link: Costco Higher Following China Store Opening