Has Costco run its course?

It’s one of the most respected retailers in the world, but has the shine come off of Costco? (Costco Stock Quote, Chart, News, Analysts, Financials NASDAQ:COST).

In a research update to clients February 12, Roth MKM analyst Bill Kirk maintained his “Neutral” rating but raised his price target on Costco from $5.02 to $601.00.

The analyst says there is no doubt Costco is at-or-near best in class, but he says the entire segment is showing signs of a slowdown.

“Costco is a best-in-class operator, with the best private label program to leverage against suppliers — a large margin opportunity,” the analyst argued. “Additionally, Costco scores in the top decile of Food Retailers (according to Yelp!) and also as the top warehouse club concept. However, as a group (pre-COVID), the warehouse club sub-segment was not enjoying the massive market share gains it did in the early 2000s. We expect group performance to be more in line with conventional retail. Much is made regarding the perpetuity features/stickiness of membership model. While we don’t disagree, we believe investors don’t give enough credit to the real estate advantages, and related stickiness of many conventional grocers.”

“As a group (pre-COVID), the warehouse club sub-segment was not enjoying the massive market share gains it did in the early 2000s…”

Kirk says the most recent data on Costco shows steadiness.

“Costco’s performance remains steady, with January U.S. comparable store sales (5 wk adjusted ended Feb 4) of +2.2% (traffic +1.5%) and +3.4% Total Company (traffic +2.7%). This period faced one less January selling day, which was a 3-3.5pp drag to sales. Adjusted for one less day, January U.S. comp was ~5.5%. This is an improvement off December’s U.S. adjusted ~4% (reported +7.4%, but one extra day). In the face of subsiding inflation, a comp sales acceleration is encouraging. By region, Costco highlighted Texas, the Northeast, the Southeast, Mexico, Taiwan, and the United Kingdom. By categories, strength was seen in Food, Candy, Bakery, Produce, Jewelry, Tire, and Health/Beauty. Garden, Toys, Seasonal, Tires and Automotive. Ancillary Business were down -LSD. We consider Costco the best-in-class operator, but believe it is close to fairly valued.