The Street Debates Whether Costco Investors Should Buy The Dip

Costco Wholesale Corporation COST reported a top-and-bottom line beat in the fourth quarter, but shares moved lower following the earnings release Thursday afternoon.

Here's how the Street reacted. 

The Costco Analysts: BofA Securities analyst Robert Ohmes maintained a Buy rating on Costco with a $400 price target.

Wells Fargo analyst Edward Kelly maintained an Equal Weight rating with an unchanged $320 price target.

MKM Partners analyst Bill Kirk maintained a Neutral rating with a price target lifted from $320 to $325.

BMO Capital Markets analyst Kelly Bania maintained an Outperform rating with a price target lifted from $340 to $385.

BofA On Costco's Q4 Print: Costco reported earnings per share of $3.13 versus the Street's estimate of $2.85, Ohmes said in a note. Same-store sales were higher by 13.6% in the U.S. excluding fuel, and 14.1% higher when factoring in foreign exchange and fuel, the analyst said. 

Ticket growth in the quarter was 12.7%, while traffic comps improved to negative 1.2% for the total company and positive 1.2% in the U.S., he said.

Online comps accelerated from the prior quarter to 91.3%.

Costco said it is benefiting from in-home and solitary leisure categories, as members are substituting money previously budgeted for vacations toward furniture, exercise equipment and more, Ohmes said.

Membership renewal rates were also high in the quarter and likely trending near all-time highs, according to BofA. 

Wells Fargo Says Costco Outperforming High Bar: Costco reported a fourth-quarter beat despite being up against a high bar, Kelly said in a note.

The report signals Costco is "clearly" executing well in a difficult environment and winning market share, the analyst said.

There is reason to believe the momentum carried over into the new fiscal quarter, he said. 

The COVID-19 pandemic is weighing on the company's financial results — especially a $2-per-hour wage increase — and management continued to push back against expanding its omni-channel capabilities, such as online purchases with in-store pickup, Kelly said. 

A "more modest" membership growth in the quarter from $1.05 billion to $1.106 billion suggests the pandemic-induced sales growth may not sustain in the future.

Costco remains an "outstanding company," but at 36 times EPS in the next 12 months, it is "difficult to justify" buying the stock at today's price, according to Wells Fargo. 

MKM Sees Different Costco Story Vs. 2000s: Costco is a best-in-class operator and considered the best warehouse club concept, Kirk said in a note.

Yet the club membership segment isn't enjoying the same level of growth it did in the early 2000s, the analyst said. 

Rivals are notably increasing their promotional activity to attract new members, and Costco fought back through "outsized" promotional membership offers in August, he said. 

Foot traffic trends point to Costco underperforming its peers since the start of the pandemic, Kirk said. 

Costco's stock is also trading at all-time high multiples at around 40 times NTM and 22 times EV/NTM EBITDA, the analyst said, adding that it's difficult to imagine how the stock can continue re-rating higher. 

BMO On Where Costco Stands Out: Costco stands out from other retailers, as around 60% to 65% of total EBIT comes from membership fees, Bania said in a note.

Costco's earnings are "more steady" compared to its rivals, especially ahead of continued retail closures, the analyst said. 

Costco also deserves credit for rising executive membership penetration and a competitively advantaged online business, he said. 

COST Price Action: Shares of Costco were trading lower by 2.35% at $338.86 at the time of publication Friday.