2024-03-12 12:54:15 ET
Summary
- The earnings report showed Costco beat expectations on same-store sales and EPS, but missed expectations on total revenue growth.
- Analysis suggests that merchandise sales, not membership fees, make up at least half of Costco's profit.
- I would go further, and argue that merchandise sales are in fact, contrary to the membership-focused consensus, the entirety of Costco's profit.
- Memberships are better understood as defraying the fixed costs of operating stores. Profits then scale with merchandise sales, which are priced more competitively thanks to memberships.
- Costco's growth seems strong but largely priced in at this level, so I am not opening a position and rank the stock a Hold.
Costco ( COST ) ( COST:CA ) stock has fallen following the release of its second-quarter earnings report last Friday. While Costco continues to command a loyal, indeed almost devout, following among its membership-plan customer base, there are increasing concerns that the stock price has run ahead of the fundamentals.
The stock fell $60 to $725 on Friday, and down to $722 in after-hours trading. The question is whether this represents the beginning of a correction or a buying opportunity. After taking a look at Costco, I am not opening a position at this time. However, my research did lead me down a very different path than some other analysts. Simply put, I don’t believe the prevailing consensus about how Costco makes money is correct....
Read the full article on Seeking Alpha
For further details see:
What Everyone Gets Wrong About Costco: Memberships Are Vital, But Not The Key To Profit