Goldman Sachs Gives Color On CostCo Following Recent Earnings Report

CostCo's COST 2Q EPS of $0.79 was generally in line with consensus estimates. More importantly, details from the call demonstrated that the company's gross margin can still expand in a broadly inflationary environment. While the headline EPS number was only in line with the consensus estimate, Goldman believes the results continued to demonstrate that COST is ideally positioned within retail to manage food inflation and gas inflation. Even when stripping out the impact of the Mexico JV and factoring in 10 bp of gross margin pressure in fresh foods, COST witnessed a sequential acceleration in its merchandise margin expansion. In addition, the company witnessed continued SG&A leverage, which should continue, given solid top-line results through February. With fundamentals improving and a potential fee increase still to come, Goldman views the 2.5% decline in the shares as a temporary correction on elevated expectations and retain a Buy rating. Goldman is also increasing its 12-month price target from $78 to $80 as it rolls forward its estimate. COST closed Wednesday at $71.76