Trade Costco if you have to, but it’s not for me

Trade Costco if you have to, but it’s not for me

Costco Wholesale (COST) released its fiscal fourth quarter financial results Thursday evening. For the 16-week period ending August 28, Costco posted GAAP EPS of $4.20 on revenue of $72.09 billion. The bottom line print beat expectations by three cents and represents net income of $1,868 billion, up 11.8% from a year ago. Revenue earnings also beat Wall Street, up 15% year-over-year.

Membership costs rose 7.5% to $1.327 billion, slightly ahead of expectations. Currency conditions had a negative effect on this figure of $29.8 million. The company ended the period with 118.9 million cardholders and 29.1 million paid executive members, up 2% and 4.3% respectively. Renewal rates hit an all-time high of 92.6% in the US/Canada region and 90.4% elsewhere.

Comp sales

Comparable store sales for the fourth quarter were as follows…

US: +15.8% y/y, adjusted +9.6% y/y.

Canada: +13.4% y/y, adjusted for 13.7% y/y.

International: +2.9% y/y, adjusted +11.3% y/y.

E-commerce: +7.1% y/y, adjusted +8.4% y/y.

Total business: +7.1% y/y, adjusted +8.4% y/y.

– Adjustments have been made for the impact of exchange rates and volatility in fuel prices.

Margin Compression

This was not in the press release. You had to listen to or read the transcript of the post-win conference call to learn what CFO Richard Galanti had to say about Margin.

Gross margin printed at 10.18%, down 74 basis from last year’s comp of 10.92%. Without gasoline, the decline would have been 22 basis points. The core commodity margin declined by 67 basis points or 23 basis points excluding gasoline. Overall, margin has been disproportionately affected by gasoline, as gasoline sales have skyrocketed and gasoline is a low-margin business for Costco.

Balance

Costco ended the period with a net cash position of $11.049 billion, down about $1 billion over the past year, and inventories of $17.907 billion, up more than $3 billion over the same period. This left current assets at $32.696 billion, which is about $3 billion. Current liabilities are $31.998 billion, giving the company a current ratio of 1.02. That relationship comes to pass, but barely. A quick ratio of 0.46 may or may not be problematic, depending on how well the company manages inventory valuation in an uncertain environment.

The total assets add up to $64.166 billion. The company does not claim value for “goodwill” or any other intangible asset. It is clear that the name alone has a lot of value. Total liabilities minus equity is $43,519B, including non-current liabilities of $6,484B. Apart from the current situation, this balance is in good condition. Obviously, carrying an increased level of current assets in inventory is riskier than in cash. That said, I find it comforting to note that Costco has nearly twice as much cash on the books as debt.

Wall Street

A number of sell-side analysts have expressed their views on COST since these results were announced Thursday. However, I only noticed three that I believe are highly rated by TipRanks. All three are rated five out of five stars.

Truist Financial’s Scot Ciccarelli maintained his “buy” rating while lowering his price target from $571 to $559. Oppenheimer’s Rupesh Parikh maintained an “outperform” rating while lowering his price target from $600 to $550. DA Davidson’s Michael Baker stuck to his “neutral” rating as he raised his goal from $440 to $445.

Conclusion

Costco performs very well. It always does. That’s what Costco is known for. The fact is that even with this morning’s discount, the stock is trading at 37 times forward-looking earnings, which is very expensive in this market. The dividend yield of 0.74% does not make the price tag look more attractive.

As for upward catalysts, that’s something that Market exploration readers know I’m looking these days, Costco may have two. Neither seems imminent, however. The company has been known to pay large special dividends to shareholders in the past. No such incident has been reported recently.

The other would be an increase in the annual membership fee. Costco could do very well in this environment, since what it sells is what households and businesses need, and they sell it in bulk at a perceived value. The company can pull this one out of its hat if necessary, but that’s on the way. CEO Craig Jelinek put that idea aside for a while last week.

Readers can see that the cup and handle pattern I set up for you earlier this summer has failed around the $564 level. A downward trend that only seems to be accelerating has been followed. Relative force is very weak. The daily MACD is in bad shape. The stock is now trading below the volume created above the $510 level. That will create stiff algorithmic resistance at that level when the stock recovers.

In the meantime, the 50-day SMA has started to decline, while the 200-day is about $45 above the last sell. “That looks technically attractive,” no portfolio manager has ever said. The stock threatens to crack the lower bound of my Pitchfork model. I believe that COST cannot be bought until we see if that level holds up.

Not that it has to happen, but should this Pitchfork fail, last May’s lows wouldn’t be unrealistic. The daredevils out there might be selling $420 puts for $3+ on October 21. The quick payout of that $3 bounty can get very expensive within a month. I’m either not that brave or not that reckless.

(Costco is a participating interest in the Action Alerts PLUS Member Club. Would you like to be warned before AAP COST buys or sells? Learn more now.)

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