Costco Wholesale Corp., which reported second-quarter results after market close Thursday, is seeing a pullback in spending on big-ticket items, but analysts say the retail giant still has a compelling story.
Companies across the retail spectrum, such as Nordstrom Inc.
JWN,
and Target Corp.
TGT,
have also highlighted cuts in discretionary spending this earnings season, as consumers focus on necessities amid an uncertain macroeconomic environment. Best Buy Co.
BBY,
also cited pressure on the consumer-electronics industry when it reported its fourth-quarter results Thursday.
Related: Costco’s stock drops 2% after retailer’s holiday sales fall short
Costco’s
COST,
stock fell 3.6% Friday, compared with the S&P 500’s
SPX,
gain of 0.5%.
Speaking during a conference call to discuss the second-quarter results, Costco CFO Richard Galanti described weakness in big-ticket discretionary items, particularly major appliances, home furnishings, small electronics, jewelry and hardware. “I think it’s a combination of the economy and concerns out there as well as particularly strong numbers that we enjoyed not only a year ago,” he said. “A year prior to that, with COVID, we, of course, benefited in big ways with those big-ticket items.”
However, analyst Scot Ciccarelli of Truist Securities pointed to the retailer’s strength despite the discretionary pullback. “Costco delivered a solid [second quarter of fiscal 2023], with very steady top-line growth trends and solid earnings flow-through,” he wrote in a note released Friday. “While the company does continue to see some softness in big-ticket discretionary items (consistent across the industry), overall sales trends remain robust, with strength across its necessities categories.”
Truist maintained its buy rating for Costco and raised its price target to $571 from $568.
Related: Target expects more retail price-cutting this year — and plans to sell more lower-priced items
Jefferies analyst Corey Tarlowe also sees positives in Costco’s results. “[The second quarter] once again demonstrated Costco’s ability to drive predictable sales and profitability with its membership model,” he wrote in a note released Friday. “While Feb sales growth decelerated vs. prior months, strong margin and expense management were able to drive a bottom-line beat.”
He continued: “Strong renewal rates and growth in penetration of high-tier memberships and private-label food sales bode well for [Costco’s second-half] performance.” Jefferies has a buy rating for Costco.
Costco’s U.S. and Canada renewal rate was 92.6%, and its worldwide renewal rate was 90.5%, which were both all-time highs.
Now read: Nordstrom’s off-price Rack stores are struggling. It’s opening more of them anyway.
BMO Capital Markets also pointed to the company’s renewal rate. “[Costco’s earnings per share for the second quarter of fiscal 2023] was slightly ahead of our estimate and Consensus, and while February appeared to start out weaker in the U.S., we note that February two-year stacks were steady and, importantly, renewal rates and membership fee growth remains strong/steady,” wrote BMO analyst Kelly Bania in a note released Thursday. Costco’s membership-fee revenue was $1.027 billion, up from $967 million in the same period last year.
“We continue to rate [Costco] shares Outperform with a $555 target price and would use weakness in big-ticket/concerns over gas margins to build positions in shares,” wrote Bania.
Costco’s stock has fallen 10.8% over the last 12 months, compared with the S&P 500’s decline of 7.6%.
Of 34 analysts surveyed by FactSet, 21 have an overweight or buy rating and 13 have a hold rating for Costco.
This post was originally published on Market Watch
