What’s Wrong With Costco?

By Douglas A. McIntyre Published Jun 19, 9:36AM EDT

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COST trades at $951, below analysts' $1,082 target, despite revenue hitting $70.5B and membership fees driving over 70% of profits.
Money flows where excitement is, and retail stocks get left behind when the broader market chases hotter sectors, and even Costco's shares are no exception.
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Costco (NASDAQ: COST | COST Price Prediction) is one of the best-managed companies in the US. Some say it is the best-managed retailer. It has the best model in the big retail business. It makes a huge amount of money by charging customers to shop in its stores before they have even bought anything.

However, Costco’s stock is up only slightly this year compared to the S&P 500.

Costco had a characteristically strong quarter, which ended May 10. Revenue moved from $63.2 billion to $70.5 billion a year ago. Net income rose from $1.9 billion to $2.2 billion. Membership fees rose from $1.24 billion to $1.73 billion. These membership fees are over 70% of Costco’s profits.

Of the 37 analysts who rate Costco, 21 rate it a “buy” or “strong buy”. The average price target for the stock is $1,082. The stock currently trades at $951.

One reason for the mediocre performance could be that it trades at 48 times trailing earnings. However, that is not a good answer. It has had a similar relationship to its sector for years.

There may have been profit-taking. It is down from its all-time peak set several weeks ago. However, Wall St. is not in a profit-taking mood, particularly for highly successful companies.

It is not the retail market more broadly. Retail sales nationwide in May rose 6.9% year over year, an unexpectedly strong result.

It is not the broader economy, particularly employment, and the effects it might have on consumer spending. The employment situation is much better than expected in the last two months, and the economy continues to add jobs.

The Costco stock problem is not management. Ron Vachris has been CEO since January 2024.

There is a theory about stocks that does not have strong support. People trade, occasionally, in and out of stocks because a sector is not as exciting as most of the rest of the market. Money flows to where the action is. The action, and the money in the market, have not flowed toward retail stocks, even to the best company in the sector.

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About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.