Costco Wholesale (COST 0.63%) experienced a surge in revenue in its most recent quarter, as consumers have been flocking to its warehouses not only for deals but also for cheap gas. With oil prices rising to levels consumers haven't seen in multiple years, there's been extra motivation for shoppers to visit their local Costco warehouses these days, as the retailer is known for offering lower gas prices.
The company recently reported strong earnings, with sales rising by 12% year over year. But despite the seemingly impressive quarter, the stock hasn't been surging on the news; in the past month, it has declined by more than 6%. Here's why the stock didn't take off, and why a rally may not exactly be around the corner.
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The growth rate was less impressive when excluding gas
A 12% growth rate is impressive in retail, especially amid current economic conditions, when consumers are struggling with higher prices. But once you look at the company's comparable growth rate, which excludes the impact of opening and closing stores, and excluding the effect of rising gas sales, the numbers aren't as impressive. The company's comparable store growth rate was 6.6% for the third quarter, which ended on May 10, and that was lower than analyst expectations of 6.7%.
The problem with gas sales is that margins are low and demand can change quickly if oil prices come down. While they may remain elevated for the foreseeable future, especially with the war in Iran still ongoing, it's not an area of Costco's business that represents a huge growth opportunity. While low oil prices did attract more traffic to its locations this past quarter, that didn't exactly lead to a huge surge in in-store sales. In the previous quarter, Costco's adjusted same-store growth rate (excluding gas) was actually higher at 6.7%.
NASDAQ: COST
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Why Costco's stock may struggle this year
Costco's business remains strong, but consumer sentiment is down, economic conditions are troublesome, and its stock isn't cheap at all; it's trading at close to 50 times its trailing revenue. For the stock to continue to rise higher, it would need to demonstrate a significantly higher rate of growth to justify that kind of valuation.
The premium the stock trades at has become grossly inflated, which is why it may not be an obvious buy despite the company's solid performance last quarter. Even though the business is excellent, the stock itself is not a great option for investors, given how expensive it has become. Unless there's a significant drop in Costco's valuation in the near term, I wouldn't think about buying it anytime soon.
