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Why Costco Wholesale Corporation Stock Fell Today

By Steve Symington - Oct 6, 2017 at 12:32PM

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Margin pressure overshadowed an otherwise strong quarter for the warehouse retail chain.

What happened

Shares of Costco Wholesale (COST 1.35%) were down 5.9% as of 12:07 p.m. EDT Friday despite stronger-than-expected quarterly results from the membership-based warehouse retailer.

For its 17-week fiscal fourth quarter ended Sept. 3, 2017, Costco's total revenue climbed 15.7% year over year to $42.3 billion, helped by a 5.7% increase in comparable sales (excluding impacts from foreign exchange and changes in gas prices), a 13% increase in member-fee sales to $943 million, and an extra week in the quarter as compared to the same year-ago period. On the bottom line, that translated to net income of $919 million, or $2.08 per share, up from $779 million, or $1.77 per share in the same year-ago period, with growth driven largely by those higher membership fees.

By comparison, Wall Street had predicted lower earnings of $2.02 per share on revenue of $41.55 billion.

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So what

Why, then, did Costco shares pull back today? For one, gross margin during the quarter fell 15 basis points year over year (or 9 basis points excluding gas). According to Costco CFO Richard Galanti during the subsequent conference call, the decline was primarily "a function of our own initiatives to drive sales and enhance member loyalty and satisfaction."

That comment served to fuel investor concerns over the negative effects of increasing competition on Costco's margins, especially in the grocery space where both traditional grocers and e-commerce rivals are bearing down. 

Now what

Costco also highlighted the launch of two new grocery delivery options on its website a few days ago. The first, Costco Grocery, offers two-day delivery on nonperishable dry food items. The second offers same-day delivery of both dry and fresh groceries through an expanded partnership with Instacart.

Ironically, however, these new delivery options seemed to further stoke investors' concerns that Costco is under pressure in the grocery market, even if they're technically astute moves that could stave off the competition and drive incremental sales. So while Costco's top- and bottom-line results were undeniably strong this quarter, it's no surprise to see shares pulling back today.

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