Costco Analysts Mostly Bullish After Q4 Earnings Beat, Growth In Membership, Traffic

Analysts praised Costco Wholesale Corporation COST for double-digit EPS and strong comparable store sales growth, and in a couple cases raised price expectations on the stock after the retailer's fourth-quarter report. 

The company beat earnings estimates by 15 cents and saw memberships grow despite a fee increase. Costco also saw nearly 20% growth in its nascent e-commerce effort.

Investors continued to push the stock price down, though, after the company's revenue number came in below Street estimates Thursday. 

The Analysts

Raymond James analyst Budd Bugatch reaffirmed an Outperform rating and $300 target price.

Morgan Stanley’s Simeon Gutman maintained an Equal-weight rating on the stock and raised the price target from $230 to $265.

Bank of America Merrill Lynch analyst Robert Ohmes reiterated a Buy rating on Costco and raised the price target from $310 to $320.

Stifel’s Mark Astrachan maintained a Buy rating and $310 price target.

The Takeaways

Consistent revenue and traffic growth over the last year shows “the membership warehouse model is arguably the most attractive business model in hardlines retail,” Bugatch said in a Thursday note. 

The company’s e-commerce effort, still in early days, has been impressive, but without materially taking away from customer visits, the analyst said. 

“New members (including millennials) and existing members continue to find value in Costco's well-edited product assortment and value proposition, which remains the key pillar to its competitive moat,” Bugatch said. “We continue view the stock and company as a compound growth story and see a pathway for further upside.”

Out Into the World

Besides e-commerce, another aspiration of Costco's looks like a good idea to Bank of America's Ohmes: international expansion. 

Costco opened its first store in China in August and saw a strong response, with more than 200,000 sign-ups — way over the chain average — and strong traffic at the Shanghai outlet, the analyst said. A second Chinese store is planned for 2021.

While Ohmes acknowledges that tariffs remain a risk, he said Costco appears well-positioned given its dominant scale and "significant mitigating strategies" for trade issues.

Stifel's Astrachan said the firm’s Buy rating anticipates mid-single-digit comparable store sales growth to continue for at least the next several quarters in light of favorable comparisons and Costco’s “sustained focus on improving its value proposition.”

Some downside risk could still exist, given expectations for a slowing of earnings growth in the year ahead and higher valuation, said Morgan Stanley's Gutman. But the fundamentals remain strong, the analyst said.  

“Our cautiousness is purely related to valuation and we continue to view COST as one of the best businesses in all of retail.”

Price Action

Costco shares were trading 0.58% higher at $290.67 at the time of publication Friday. 

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