Costco's Choppy Q1 Traffic Leaves Wells Fargo At Market Perform

Costco Wholesale Corporation COST reported solid Q1 results, broadly in line with expectations. The results reflected continued challenges, however, in the operating environment for retailers, “driven by product cost/price deflation and a broader competitive landscape,” Wells Fargo’s Zachary Fadem said in a report.

Fadem maintains a Market Perform rating on the company, with a valuation range of $150–$155. The EPS estimates for 2017 and 2018 have been reduced from $5.89 to $5.83 and from $6.51 to $6.46, respectively.

Results Reflect Choppy Traffic

Costco’s top-line results for 1Q met expectations. The EPS came $0.03 short of the Wells Fargo estimate, with an improved merchandise mix and benefits from the Visa Inc V credit card transition being more than offset by increased investment spending, Fadem noted.

Traffic trends decelerated by 30bps (basis points) quarter-over-quarter, reflecting a 55bps decline on a two-year basis. Traffic was likely impacted by slower pre-election traffic, the analyst mentioned.

In light of the decelerating traffic trend and stiffening competition, Fadem recommended waiting for “a better entry point” for Costco’s shares. He expressed optimism, however, regarding the company’s long-term growth prospects, adding that the recent drivers of negative comp, including deflation, cannibalization and tobacco reduction, would likely “prove transitory in upcoming quarters.”

Image Credit: By Nandaro (Own work) [CC BY-SA 4.0], via Wikimedia Commons