Costco Wholesale (COST 3.27%) has been a top stock for years. It operates a successful and predictable retail model that doesn't change much; it just takes in high profits and generates loads of cash, which makes investors very happy.
Every now and then it makes an announcement outside of earnings that moves the needle. It could be something like a membership fee increase or special dividend issue, both of which might be happening soon.
But there was an announcement of a different sort this past week, one that has much larger implications than either of the above. Wall Street didn't take it too well, but they might be getting this wrong. Let's see why.
Out with the old, in with the old
Costco announced that longtime CEO Craig Jelinek, who has headed the warehouse giant since 2012, would be stepping down from the post next year. Taking his place is Ron Vachris, who has been president and chief operating officer (COO) of Costco since last year. The company says that this succession has been planned for a while, so no surprises here. Jelinek was also an insider who was president and COO before he became CEO.
Vachris has been with Costco for 40 years, starting his tenure as a forklift driver and holding positions in almost every part of this company since then. As a company veteran with years in leadership positions, he's well-acquainted with how things roll at Costco. It's likely to be a smooth transition with no major hiccups. So why did Costco stock fall on the news?
Volatility + new leadership = fear
Costco's been reliable for growth and stock gains, but it's been dealing with some of the most variable performance in its history since the pandemic started. And although that was incredibly positive when it started, with about two years of elevated sales and comparable sales growth, performance wound down earlier this year and began to head into negative territory.
The most recent quarterly results demonstrated a return to growth and a move toward stability. But that hasn't been sustained yet, and there are other signs that Costco isn't quite back to its sturdy self yet.
For the time being, management is holding off on a membership fee hike. Management says that its customers have enough to deal with in the inflationary climate, and that traffic and volume trends are strong enough right now to deter it from implementing a raise in fees.
When a CEO steps down amid volatility, it adds another dimension of instability to the stock and generates heightened anxiety about what's coming next. Will the new CEO be able to manage as effectively as Jelinek, who has turned the company into a retail powerhouse? All signs point to yes, but there's uncertainty, and therefore risk.
Everybody calm down
There doesn't seem too much to worry about here. This succession is deliberate and doesn't leave unanswered questions.
I don't know if Costco waited until performance improved before making the announcement, but it sure does seem like the right time. The company turned a corner in the 2023 fiscal fourth quarter (ended Sept. 3), with sales returning to stronger growth, or a 9.4% increase year over year. Comps were weaker, up only 1.1%, as consumers are still focusing on cheaper products.
Earnings per share (EPS) were also back in growth mode after falling in the third quarter. EPS was $4.86 in the fourth quarter, up from $4.20 last year, and $14.16 for the full year, up from $13.14 last year.
This uptick was reinforced in the September results. Sales increased 6% from last year, and comps were up 4.5%. That news provided shareholders with a semblance of security before they heard that Costco is changing CEOs.
If all goes as planned, which looks likely, it will serve to highlight Costco's stability and strength, and that will lead to stock gains. Costco is the leader in its retail model and should have decades more growth ahead. When it does eventually go ahead with announcements of fee hikes and special dividends, expect its stock to jump.