Why Did Costco Stock Price Drop Last Week

Despite strong growth, tightening margins have caused investors to worry.

Costco stock price (NASDAQ: COST) dropped on Friday after the bulk-retailer posted its first quarter earnings report. The earnings report made investors question the longevity of Costco’s business model as its margins have shrunk in the quarter, not to mention operating income was also down. As a result of the questionable first quarter performance, Costco share price fell by 7.9 percent on Friday.

Costco Wholesale Corporation shares were the second-biggest decliner in the S&P on Friday. Costco shares had dropped by 8.1 percent, making it the worst day since 2008 for percentage decline.

When looking at Costco stock history, the quarter was a strong one for the company. The company said that comparable sales were up by 7.5 percent globally and 8.3 percent in the United States. E-commerce sales increased significantly by 26 percent. Even earnings per share increased from $1.45 to $1.73, this surpasses analyst estimates of $1.65. The earnings per share increase was attributed to a low tax rate.

Despite strong sales and growth, it was the margins that worried analysts and investors. The competitive market that Costco operates in has caused the company to spend more on e-commerce growth, which has tightened margins. Walmart and Kroger are also making advancements on their e-commerce business, causing Costco see slim margins on its grocery products. With the purchase of Whole Foods by Amazon, the grocery-pickup landscape is becoming more saturated each quarter, making it harder for Costco to keep a strong margin. This leads to selloffs and evidently causes the Costco stock price to slide. When comparing Costco’s traffic growth against its competitors, it comes out on top. Customer traffic growth grew 5.2 percent for Costco, with 3.4 percent and 5.1 percent for Walmart and Target respectively.

Costco’s investments have caused it to lose 50 basis points in its gross margin. This meant Costco’s operating income fell from $951 million to $949 million.

Management seems to have the margins under control, it is clear that Costco is looking to win market share at the sacrifice of short-term profits. 

The Future Of Costco Shares

Costco as a company is still in a strong position, although because Costco stock price is so high investors have high expectations of it making gains. Costco has a P/E of 29, which is high for most retailers. Moving forward, to ensure there are no more selloffs and to make gains in the Costco stock price, the company must improve margins.

Our analyst gives Costco stock a 12-month forecast of $250.00.

Our analyst gives Costco stock a “BUY” rating.

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