Costco Wholesale (COST) stock closed in the red on May 29, even after the company delivered a solid Q3 performance featuring record-breaking gasoline volumes.
The final five weeks of COST’s third quarter represented the five highest-volume fuel weeks in its history, driven by elevated gasoline prices as the Strait of Hormuz remained effectively closed.
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Versus its recent high, Costco stock is now down about 13%.
www.barchart.comWhy Did Costco Stock Tumble After Q3 Earnings?
Operationally, the quarter was undeniably strong, with total revenue coming in ahead of estimates at $70.53 billion on a 15% year-on-year increase in adjusted earnings per share (EPS) to $4.93.
However, the market focused on what lay beneath the surface. When adjusted for gasoline prices and currency fluctuations, same-store sales growth moderated to 6.6%.
Much of the apparent Q3 strength came from elevated fuel prices, not organic volume growth in core merchandise. And since gasoline is among Costco’s lowest-margin products, the increase in fuel sales actually compressed its overall profit margin in the third quarter, making investors bail on COST stock after the release.
Should You Buy the Dip in COST Shares?
Investors must exercise caution in buying the post-earnings dip in Costco shares, given its membership metrics are showing signs of deceleration.
The retailer ended its Q3 with 82.9 million paid memberships — up 4.1% on a year-over-year basis — while membership fee revenue rallied 10.7% to $1.37 billion.
Still, analysts warned that membership growth has been slowing sequentially, which matters given it historically accounts for about two-thirds of the company’s operating profit.
These weaknesses are particularly significant for COST given it’s trading at a premium multiple of nearly 49x forward earnings, which dwarfs not just its retail peers but the best-of-breed AI stocks like Nvidia (NVDA) as well.
What’s the Consensus Rating on Costco Wholesale?
On the flip side, it’s worth mentioning that Wall Street hasn’t thrown in the towel on COST shares, though.
The consensus rating on Costco Wholesale remains at “Moderate Buy,” with the mean price target of $1,094 indicating potential upside of nearly 15% from here.
www.barchart.com On the date of publication, Wajeeh Khan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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