Time to Give Up on Costco?

Costco (Nasdaq: COST  ) reinforced what we already knew when it gave a negative second-quarter forecast in its January sales press release. Things are pretty bad out there, and no retailer’s immune.

The warehouse discounter said same-store sales in January dropped 2%; comps would have increased 5% if negative impacts from gasoline price deflation and foreign currency exchange were taken into account. Total sales slipped 0.2% to $5.1 billion.

Costco disclosed the fact that second-quarter earnings will be “substantially below” the $0.70 per-share consensus analyst estimate, and said it will not give any more forecasts for the rest of 2009, given uncertainties about the economy and consumer behavior. Chief Financial Officer Richard Galanti pointed to general economic conditions pinching sales, and said sales of non-food merchandise have been challenging. So the difficult economic climate has also hurt merchandise margins.

None of this is really that surprising, since there were similar tidings in last quarter’s results, at least in terms of economic pressures. One difference last quarter was that Costco was helped by gasoline profitability, and at the time I mentioned the fact that gasoline prices were already dropping, and that might make things difficult for Costco in the near term.

Meanwhile, it’s no secret that consumers are really reining in their spending, because of fear or necessity. This bodes well in some ways for discounters like Costco, Wal-Mart (NYSE: WMT  ) , and Target (NYSE: TGT  ) , but at the same time, nobody’s immune to the negative pressures. (Not even Wal-Mart, if you recall.) And retail in general is struggling; we’ve heard similar talk of the nasty environment from retailers like Best Buy (NYSE: BBY  ) , and Macy’s (NYSE: M  ) recent tidings certainly didn’t seem like magic.

I recently pointed to Costco as a stock that will hold up your portfolio, and today’s price drop presents a good opportunity. It’s a company with a great business model and an impressive management team, and its mission to provide low-priced wares makes it one of the retailers that should be able to do well despite the economy. It’s also got manageable debt levels and cash on the balance sheet. As much as today’s news isn’t exactly exhilarating or cheerful, it’s also not surprising, nor is it the end of the world for Costco.

Wal-Mart Stores, Costco Wholesale, and Best Buy are Motley Fool Inside Value recommendations. Costco Wholesale and Best Buy are Stock Advisor picks. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy that loves a warm cup of hot chocolate.


Read/Post Comments (0) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 824692, ~/Articles/ArticleHandler.aspx, 12/18/2014 6:36:44 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement