What’s Wrong With Costco?

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.