Time to start worrying about Costco

This great retail story isn't unraveling yet, but it's picking up some snags.

By InvestorPlace Mar 6, 2014 1:36PM

A Costco Wholesale store in Illinois
© Tim Boyle/Bloomberg via Getty ImagesBy Ethan Roberts


Costco (COST) reported second-quarter fiscal 2014 results Thursday morning, and Wall Street finally seems to be developing some skepticism of the warehousing giant and the stock.


Earnings came to $1.05 per share on revenue of $26.31 billion, both well under last year's figures of $1.24 per share on $24.87 billion in sales. Costco earnings also failed to meet Wall Street's expectations -- analysts were projecting profits of $1.17 per share and revenues of $26.65 billion.


Investors reacted by knocking the stock down by 2.3 percent in midday trading.


A Costco spokesman cited weaker sales and gross margin results in non-foods, weaker gross margins in fresh foods, and lower international profits due to a weakening of foreign exchange rates.


Margins are an especially sticky point with Costco given its much-ballyhooed practice of paying much more livable wages than the likes of Wal-Mart (WMT) and other competitors.

Same-store sales in the United States were up 4 percent, including gasoline sales. Backing out gas and negative currency exchange rates, same-store sales rose 5 percent, both domestically and overall.


Perhaps the most refreshing thing from the report: Weaker Costco earnings were not blamed on bad weather, as several other retailers have done recently.


It also was interesting that Costco did not publish any forward guidance. But, for the record, consensus estimates for the current quarter call for earnings of $1.14 per share on $25.92 billion in sales, and full-year expectations are for $4.84 per share on $112.84 billion in sales.


Perhaps the most disappointing thing about Thursday's report is the fact that COST stock is slowly losing its grasp on its role as one of the better retail stories of the past couple years.


Since the market lows of 2009, Costco shares have been on a roll. From March 2009 to November 2013, the stock rose nearly 280 percent.


However, revenue and gross profits were also down in the last quarter, so after several years of solid performance, this makes three quarters in a row that Coscto earnings have disappointed.


It would seem the Street is now saying, "Fool us once, shame on you. Fool us a few times, shame on us."


As you can see from the accompanying chart, Costco stock has bounced back recently after a sharp decline between December and February. The 200-day moving average is still rising; however, the 50-day has now crossed below the 200-day, which usually does not bode well for stock performance.

Also notice the increase in volume on recent down days. Meaningful support levels on the stock kick in around the $110 area, with the next lower support area around $105.


Another cautionary note for investors is the heavy and significant recent insider selling at Costco. Several different corporate executives sold shares of stock between October 2013 and January 2014 in the $116 to $124 price range. Most of these were direct sales on the open market, and not the automatic kind, nor simply option expirations.


cost-stock-trading


Given the weaker earnings lately, it would appear that COST stock could easily begin to languish behind competitors such as Wal-Mart, Target (TGT) and even the dollar stores, such as Dollar Tree (DLTR) and Family Dollar (FDO).


Over the past year we have seen that following an earnings miss, it can take six or eight weeks for retailer stocks like TGT, DLTR and FDO to rebound. Therefore, I suggest that investors would do well to put COST stock on spring break for now and look for something better until after Easter.


More From InvestorPlace

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

28Comments
Mar 6, 2014 2:26PM
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Another example of the lazy writers we have in todays society.


"Earnings came to $1.05 per share on revenue of $26.31 billion, both well under last year's figures of $1.24 per share on $24.87 billion in sales."


$1.05 (this year) well under $1.24 (last year) - Check

26.31 billion (this year) well under 24.87 billion (last year).- HUH ?!?


Must be more of the $15.00/hour crowd who can't fulfill a drive through order properly, who have zero ability to read what they write. Probably too busy texting and doing social media on their phone while ATTEMPTING to do a job.


Pathetic.

Mar 6, 2014 2:23PM
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People are so busy at their shovel ready jobs they don't have time to go to Costco they been shoveling snow for months now.

Mar 6, 2014 3:11PM
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What a foolish article writing like the sky is falling on Costco.
Mar 6, 2014 4:05PM
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Only in America can a Company be chided for making a profit, just not a big enough one in their eyes. You do realize that eventually the laws of mathematics/probability, will say it is impossible to keep record profits at this level? This is the corruption of greed on the Corporate level.
Mar 6, 2014 3:54PM
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BTW, Costco is NOT a retailer by any stretch of the imagination. Unline other true retailers, Costco is not permitted to make more than 13% mark up (not sure if its 12 or 13) on any product. They are considered a membership wholesaler, therefore limited on the markup they are permitted to make. Secondly, yes, they do treat their employees much better than other retailers. Why? Because its the Costco model. It works. There are times when the profit margins will decrease as mentioned above. However, no need to cry for this company at all. When they get to the point where they are no longer making money. Whoever states their buys are not good is simply misinformed completely. My brother sells Costoc, trust me, their purchases are great and their prices are fantastic.
Mar 6, 2014 4:58PM
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Wow beat Costco down you can do the math and hate when the people who work at Costco make a good wage. Costco offers good products with a fair mark up and the best part of Costco is I have never found a grumpy person who work their unlike Wal-Mart who beat their people.
Mar 6, 2014 1:50PM
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Only if you are an employee. Less profit share.
Mar 6, 2014 4:28PM
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Costco operates on margins well below what other retailers require. They could easily move their margins up fractionally to improve their profitability, if they absolutely need to. This is a very disciplined company that always takes the long view in running the company. It is a core investment holding for many long term investors because of their disciplined operating standards. This is a company you can own when the economy is doing poorly and when the economy is growing. There are few companies in the retail community that are as well managed.
Mar 6, 2014 3:41PM
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thank god they add internet sales to the zip code the store is located in or same store sales would be negative. employees buy a lot of stock in the next month.. bonus and k matching happen along with biweekly paychecks..Tuesday next week starts the buying...thank god employees make good money and invest heavily in the place they work ...April  8th sell and run not today....without 401 k money this market is not going up.. Tuesday is the biggest inflow of k money...why not tell people the truth....markets pull back to let in k money .why is Tuesday the best up day every week...paid on Friday . wall street gets paid Tuesday.. or two days after you get paid.... so fixed. watch and research.. 
Mar 6, 2014 7:09PM
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Beginning to work on my MBA to combine with an engineering degree, I am amused by the "business" and "financial" stories on this site.  .  I really love to read the articles on this site because they are obviously "written" or "researched" by people who have no idea what they are talking about.  Very funny!  Hilarious, actually.  When is MSN going to (a) hire competent people to head up these various "departments" who are not English majors? and  (b) provide "current" stories which have not been recycled five or six times in the past?
Mar 10, 2014 12:23AM
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That is good I am paying Sam's for nothing but deals direct from Manufacturers that suppossed to sell shipper because overhead expenses They only pay rent  for space in Sams  and Sam's Charge You and The Brand Manufacturer that earn more selling direct to You and Sam's still pay lower Salaries to Their employees
Mar 6, 2014 4:02PM
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It's easy to say these large box stores need to pay employees more.  A noble idea but you see the results as Costco which does pay a better living wage, suffers for it.  Not the main reason but certainly a factor as the story notes.  I'd still rather shop Costco, Target or almost anywhere other than Wal Mart.
Mar 7, 2014 10:33AM
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at least the directors and executives are getting their fair share...
Mar 6, 2014 7:54PM
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Incorrect reporting makes for misleading comparisons and analysis--never a good thing.  Costco is not the greatest shopping experience for me.  It's too crowded and I can get better deals elsewhere with a little work.  For families, it might be a good thing. 

One experience I had there, among others that were just OK: 

I was going to buy a mattress there, but Costco has no service to transport it to my home nor to remove the old mattress, which is a major headache. 

They do recommend services that will transport goods to your home at an extra charge, but the one I called did not respond (and I still would have had to figure out how to get rid of my old one)

So, I bought my new mattress elsewhere where transport, set up and removal of the old mattress were included--equivalent mattress at about the same price as Costco's.

In short, Costco may be a great place to shop for some, but not for me.
PS.  Costco has NO  Express lane for people who have just one or a few items--another reason I rarely shop there (aside from inconvenient locations).

Mar 6, 2014 4:08PM
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employees give up right to blog when they sign agreement to work there.. You make good money to shut up....where is this freedom to speech...7.50 an hour lets the truth be told at walmart....20 an hour at costco and you have to stay quiet or you work for walmart....
Mar 6, 2014 7:50PM
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Costco is supposed to walk on water. I guess reality is catching up with them.
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No way this can be true, I have been reassured by many liberals that all Walmart needs to get their act together is to start paying more of a living wage just like Costco!
Mar 6, 2014 3:54PM
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While paying well above Walmart may have positive PR and help retention, it requires good management to turn retained workers into increased productivity and good marketers to turn the good PR into increased sales. It is the dream of every business person to be able to have the best employees in the field and to pay them the highest wages, but to expect it is foolish. In the real world pay should be a percentage of sales and be tied to increases in productivity.
Mar 6, 2014 3:36PM
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Anybody that really stocks up at Costco is a real fool.  I'm on my 2nd membership and I know that 98 percent of the things sold in their stores are not a good buy at all.  It's the 2 percent of things they sell (jewelry and meats) that makes me come back.
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