Key insights
- Costco's stock declined despite solid Q3 earnings that beat revenue expectations, driven by strong comparable sales and e-commerce growth. The sell-off appears attributed to high investor expectations and Costco's elevated valuation, a recurring pattern post-earnings. While analysts raised price targets, the stock's valuation remains a headwind, suggesting limited near-term upside despite operational strengths.
Shares of Costco Wholesale (COST 3.83%) were heading lower today after the company delivered solid results in its fiscal third-quarter earnings report, but they weren't quite enough to please Wall Street as high expectations were baked into the stock coming into the report.
As of 10:58 a.m. ET, the stock was down 4.6% on the news.
Since Costco reports monthly revenue and comparable sales, there aren't too many surprises in its quarterly report, but the retail giant still managed to top estimates.
Costco reported comparable sales growth adjusted for gas and foreign currency of 6.6%, and overall revenue rose 11.6% to $70.53 billion, ahead of expectations at $69.81 billion. Growth was driven by record gasoline volumes as consumers looked to Costco for savings during the quarter. Earnings per share rose from $4.28 to $4.93, meeting expectations.
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Digitally enabled sales rose 21.5%, showing Costco's e-commerce investments are continuing to pay off, and CEO Ron Vachris told investors that gas customers tend to spend more than the average customer in the warehouse, making the additional fuel traffic valuable.
There weren't any red flags in the report, and the analysts who weighed in on the report mostly raised their price targets on the stock.
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Costco's valuation is still a headwind on the stock, and it seems to be the reason why the stock sold off. The move was predictable as Costco often pulls back following its earnings report, as the company's valuation is hard to justify from its growth. The premium in the stock comes in part from Costco's resilience and economic moat.
Over the long term, the stock still looks like a winner, but with a price-to-earnings ratio of 49, investors should expect more bumps like today's.