Costco Wholesale (COST 1.01%) has been a great stock to own over the years. Its share price soared 165% over the past five years, crushing the S&P 500 (and its 56% return) by a wide margin. Managing a business that offers quality merchandise at discount prices in a customer-focused shopping environment is something that will never go out of style, and it has produced outstanding results for Costco.
More recently, however, this top retailer released some disappointing news that has shareholders talking. It could just be a temporary speed bump, or it could be a sign of worse things to come. Let's take a closer look at what's going on with Costco.
A rare decline in one key metric for Costco
When Costco releases its quarterly figures, it generally doesn't offer a lot of surprises for shareholders. That's because the business also reports sales figures on a monthly basis, providing a valuable peek into its state of affairs. During the five-week period that ended April 2, the most recent data available, Costco posted $21.7 billion of net sales, up 0.5% year over year. On its own, this metric could be a cause for concern given that the company has reported stronger gains in the recent past.
However, investors need to focus their attention on comparable sales (comps), which measure sales from warehouses open for more than one year and from e-commerce websites operating for longer than one year. In March, overall comps declined 1.1% for the company. This comes after a 17.2% gain in comps in March 2022.
This report, while somewhat shocking, might not be that surprising to investors. In its most recent fiscal quarter (the second quarter of 2023 ended Feb. 12), Costco reported net sales of $54.2 billion, up 6.5% year over year. In the quarter before that, net sales increased 8.1%. And during the fourth quarter of fiscal 2022, net sales of $70.8 billion translated to a 15.2% increase. Costco's business was already showing signs of slowing down over the past several months, following two outstanding years of growth in fiscal 2021 and fiscal 2022.
Shareholders will probably point to how difficult it is for a business the size of Costco to continue its outsize double-digit growth after coming off two strong fiscal years. This makes sense, as those were outlier years for the company. Additionally, the blame could simply go to the uncertain macroeconomic environment. Inflation that's still at levels not seen in decades, coupled with higher interest rates, can certainly be enough to squeeze a consumer's wallet. Even Costco, which specializes in providing quality goods at low prices for customers, isn't immune to what's going on in the broader economy.
To be fair, excluding the volatile effects of gasoline prices and foreign currency swings, comps in March would've been up 2.6%. That's better than a decline, but it's still something that investors would've looked twice at.
Should Costco investors sell?
With the recent March sales data on shareholders' minds, many are probably wondering if this is a sign to sell the stock. This kind of thinking might be justified for those with a short-term investing mindset, as it's unusual to see a business the caliber of Costco posting negative comps. But the question long-term investors should think about is whether this is just a temporary issue or something more permanent. If it's the former, then Costco should be fine once the economic picture improves. If it's the latter, then it might be a cause for reevaluation of an investing thesis.
To be clear, I believe the recent sales slowdown is not a permanent development. As I've stated before, this is one of the world's best retailers and it has a fanatical customer base. And it possesses a long history of boosting sales and profits, impressive financials that have rewarded shareholders over the years. Even at a current price-to-earnings ratio of 36, investors are better off holding their Costco stock.
