Please ensure Javascript is enabled for purposes of website accessibility

Profits Fall Off for Costco

By Mark Reeth and Simon Erickson – Mar 6, 2014 at 7:34AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Costco's earnings are in and profits are down. Time to worry or time to buy?

Shares of Costco (COST 1.10%) are down today after the company reported a 15% drop in profit. Unusually for the company, it cited weak gross margins as the source of the profit slump, something many investors didn't expect from Costco and its membership-based business, which usually has more robust gross margins than the traditional retailers.

In this video from Thursday's Stock of the Day, Motley Fool analyst Simon Erickson says he sees the gross margin weakness as coming from overly aggressive discounting to move inventory, which directly affected the company's bottom line. Same-store sales and revenue were both up this quarter, however, which raises the question: What is the most important metric to focus on when understanding Costco?

Simon says that for Costco the most important metric continues to be membership growth. The company added another 4.3 million members in total last year, which he still sees as a healthy number that should inspire investor confidence. While the stock looks more expensive today than a traditional big-box retailer from a price-to-earnings perspective, Simon still likes its membership model better than traditional retail-business models, and still sees the stock as a long-term buy today.

Mark Reeth has no position in any stocks mentioned. Simon Erickson has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Costco Wholesale. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.