Shares of Costco (COST) are sliding after the retailer posted a mixed fourth-quarter earnings report. Revenue came in at $79.70 billion, falling slightly below the expected $79.96 billion. Meanwhile, US comparable sales, ex-gasoline and currency impacts, were better than analysts were expecting.
Roth Capital Partners senior research analyst Bill Kirk joins Morning Brief to dig into the earnings report and how it has impacted its stock valuation.
Kirk believes that Costco’s stock is “priced nearly for perfection,” telling Yahoo Finance, “It’s universally loved, it’s operating extremely well, and the valuation and where it trades reflects that.” While the stock is under a bit of pressure following the earnings report, he explains, “Any little pause in momentum, any little hiccup in margin is accentuated when you have a valuation that high.”
While Costco is still in a relatively strong position, Kirk is cautious about the stock’s room for growth: “They’re still gaining share. Their member age is getting lower which is wonderful. Pharmacy is up double digits. Optical is up double digits. E-commerce is up nearly 20%. They’re still doing lots of things very well, but they’re not necessarily accelerating. And when you have a valuation as high as 55 times on P/E (price-to-earnings ratio), you need to continue to accelerate. When you start to maybe stall, even at wonderful levels, that’s when you give up a little of your gains.”
He notes that Costco is well-positioned to benefit from a weaker consumer seeking value. Kirk explains that the retailer offers some of the best value in areas like groceries, which usually gets a boost when consumers shift away from dining at restaurants. In addition, he praises Costco’s ability to capture younger consumers, calling it a “wonderful long-term sign for gaining share.”
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