Costco Losing Altitude Despite Strong Quarter

Costco Wholesale Corp. (COST) sold off more than 2% on Friday despite beating Q3 2021 top and bottom line estimates by healthy margins. The big box retailer earned $2.75-per-share during the quarter, $0.47 better than expectations, while revenue rose a healthy 21.8% year-over-year to $44.38 billion, more than $500 million higher than consensus. U.S. sales rose 15.2% while e-commerce sales eased off the torrid 2020 pace, rising a still-impressive 38.2%.

Weak Buying Interest

The stock is finally trading in the green for 2021 following a steep first quarter decline that shed nearly 20%. A broad-based rotation out of the COVID-19 beneficiaries and into recovery plays dampened buying interest after last year’s impressive 29% return and it’s been slow to return.  Even so, Costco was trading at a 35.5 forward price-to-earnings (P/E) ratio before the report, marking a premium to rivals Walmart Corp. (WMT) and Target Corp. (TGT).

Telsey Advisory Group analyst Joseph Feldman raised his target to $415 on Friday, noting “Costco should remain a share gainer, with its solid sales, high membership renewal rates (110MM total members), and square footage growth of LSD. In FY22, Costco should continue to generate solid EPS growth, driven by a MSD comp, MSD-HSD membership fee income growth, healthy digital growth, and lapping COVID-19 related costs. We maintain our Outperform rating.”

Wall Street and Technical Outlook

Wall Street consensus stands at an ‘Overweight’ rating after last year’s strong performance, underpinned by 19 ‘Buy’, 4 ‘Overweight’, 10 ‘Hold’, and 2 ‘Underweight’ recommendations. Price targets currently range from a low of $249 to a Street-high $415 while the stock closed Friday’s session more than $35 below the median $416 target. This low placement highlights Main Street discomfort with the higher-than-historical valuation.

Costco has been a superior performer for more than a decade, posting a long series of new highs. It broke out above February 2020 resistance at 325 in July and entered a healthy uptrend that posted an all-time high at 393.15 in November. The subsequent decline found support at 307 in March while a V-shaped recovery into May stalled four points below the 2020 peak. Weak accumulation during the uptick has failed to reach prior highs, setting the stage for mixed two-sided price action into the second half.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.