Let’s start with my “Walk Down Main Street” at Costco (COST) this weekend.
I made a HUGE mistake.
Normally, I try to go to Costco on a weekend night just to avoid the crowds. This week was different.
I figured “hey, Costco missed their revenue mark by 1% on Thursday, that must mean there are fewer people in the store this weekend, right?”
HA!
Buy this stock on the pullback, they won’t miss that number again.
Here’s the rundown…
I spent about $430 for my monthly trip. It was the normal cart full of staples and a few unnecessary items that they always do a good job of selling me.
Here’s the thing… it took longer to wait in line for the register than it did to fill the cart. Costco is not suffering from any slowdown in their business model.
So why did the stock fall 6% on Friday after its earnings? Priced for perfection, that’s it.
Sure, COST missed their revenue by a small margin, but the EPS and outlook were right in line with The Street’s expectations. The miss on revenue was nothing more than an excuse for profit-taking, setting up an opportunity to buy the best retailer in the industry at a bargain.
Looking a little deeper into the report, one of the “expectations” that wasn’t met focuses on membership fees.
In 2023, the company raised $4.5 billion in membership fees. The fees represent up to 70% of the company’s profits.
Analysts believed that the company’s CFO would announce a membership hike since they haven’t done so since the last hike in 2017. Let’s face it: This would be an “easy money” move by management considering how much of the membership fees go to the company’s bottom line.
But Richard Galanti, CFO of Costco, announced the fees would remain level.
The thing most people aren’t talking about… is that his last day of work as CFO is this Friday.
Now, I’m not expecting a membership fee hike next Monday, but I’m starting to believe that the newest CFO will have a different story to tell during the next quarterly earnings call.
The last time that Costco announced a raise to membership prices was June 1, 2017. The stock fell 16% in the month following, but that was based on less than expected earnings results, not the membership fee change. Shares nearly doubled in the year following that bottom.
Bottom Line
Costco shares are still 56% higher for the last year’s trading while the stock has traded with less than half of the volatility of the Nasdaq 100.
This week’s pullback is likely to test the stock’s 50-day moving average at $700, representing almost exactly a 10% healthy correction from its highs.
Take the opportunity to put a few shares of Costco in your cart on this healthy pullback.
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.