Anders admires Costco (NASDAQ:COST) as a company. I won't argue that point. It does treat its employees admirably. But that doesn't translate into higher profits, or a great investment right now. As I stated in my opening argument, even though I love the shopping experience, I'm not feeling the same toward the company's shares.
Anders points to the company's operating-margin growth, which is better than that at BJ's (NYSE:BJ) and Sam's Club. This may be true, but just to reiterate, its gross, operating, and net margins have been falling. The declining trends have been going on for at least the past three years now, so the problem goes beyond a single-quarter hiccup -- for example, the allowances for sales returns last quarter that management wanted investors to back out. Try running a grocery store and saying you would've earned more except for those pesky returns and the need to pay employees.
The problems for Costco aren't just company-specific. The overall economy is threatening many retailers, and we've seen the impact on retailers across the board. Sure, Costco attracts higher-end consumers, but we recently witnessed the bull's-eye shrinking at Target (NYSE:TGT), a fellow discount store that also attracts more affluent customers. Analysts, meanwhile, recently slashed their earnings estimates for Wal-Mart (NYSE:WMT) by nearly 8%, and no matter what your favorite news source is, you'll find a slew of articles discussing the poor outlook for our economy.
We're faced with a company that has already been experiencing negative profit growth throughout the past year. The company has shown signs of struggling and is operating among unfavorable economic conditions, such as credit woes and falling home prices.
So can the company really revitalize its earnings potential with all of the additional factors to contend with? I don't think so. To top things off, the company commands a rich stock price of 26 times trailing earnings and a PEG of 1.91.
So jump on the bear train. This company may offer some great deals on bulk boxed cereal, but when speaking of its stock, there's not much worth crunching on.
Check out the other arguments in this Duel, and then vote for a winner.
Costco is a Stock Advisor recommendation, and Wal-Mart is a Inside Value pick. Try out either service free for 30 days. Now that's a real bargain.
Fool contributor Larry Rothman is happy to receive feedback, and he promises to read it when he's not being wrestled by his three children. He doesn't have any positions in the companies mentioned. The Fool has a disclosure policy.
