In this segment from the Motley Fool Money podcast, host Chris Hill and Fool senior analysts Aaron Bush, Ron Gross, and Matt Argersinger talk Costco, which turned in a strong quarterly report with higher comps and all the types of results investors usually love to see. But this time, the focus of Wall Street was on the company's "material weakness" warning.
Due to inadequate internal controls, unauthorized people could have accessed the company's financial-reporting systems. That would be bad, of course, but as yet, there's no sign anyone actually did, and an audit is underway.
A full transcript follows the video.
This video was recorded on Oct. 5, 2018.
Chris Hill: Costco's fourth quarter results were pretty good but shares down on Friday. Wall Street, Ron, seemed more interested in Costco's warning about a material weakness. What is all this about?
Ron Gross: As you and I were talking before the show, anytime we see "material weakness" in a headline, we get a little nervous. But I think this is much ado about nothing. They've identified a problem with their financial reporting, where some of the company's information technology department and maybe some outside contractors had access to the financial control system at Costco. But it doesn't appear to have affected anything. The company doesn't think any kind of misstatements will be necessary, although they need to complete their review.
I think, in the end, this shouldn't happen, and they should be more careful, but it probably has no real effect. Therefore, we can go and focus on the actual results of Costco, which are pretty strong, with comp sales up 9.5%. They're saying in-store traffic is as strong as it's ever been, up 4.9% for the quarter. The one area of concern is online growth. The ever-important online growth in the age of Amazon is actually decelerating, 26% vs. 36% in the previous quarter. Something to keep an eye on. But profits were still up 14%. The company's doing really well. Stock's not cheap right here at around 30X vs. something like 15X for Target. But the company's putting up solid numbers.
Hill: I mean, there's not really a good time to have problems with your financial controls, but particularly as we're heading into the all-important holiday season, it would seem like they want to get this behind them as quickly as possible.
Gross: For sure. From a technology perspective, that's not hard to do. The review may take a little longer to see if they need to restate anything or if any breach really impacted anything. I think in the end, though, everything will be fine.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Aaron Bush owns shares of Amazon. Chris Hill owns shares of Amazon. Matthew Argersinger owns shares of Amazon. Ron Gross owns shares of Amazon and Costco Wholesale. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.