Deutsche Bank Speculates: Costco Could Be Past Its Prime

Costco Wholesale Corporation COST, fresh off a 7 percent decline on Friday, was slapped with a downgrade Monday by analysts at Deutsche Bank who believe the wholesaler is past its prime.

Deutsche Bank's Paul Trussell downgraded Costco's stock rating from Buy to Hold with a price target slashed from $187 to $172 under the assumption that there are no more positive catalysts left in the pipeline. The list of completed positive catalysts include:

1. A switch in co-branded credit cards.
2. A membership fee increase.
3. A special dividend.
4. A dividend increase.
5. IT modernization.
6. Lapping the first wage increase since 2007.
7. Lapping year-over-year gas price declines and foreign exchange pressures.

After the completion of the multiple positive catalysts, there are no more left in the pipeline to provide "the next leg of the story," Trussell emphasized.

Online And Grocery Concerns

Costco's online sales growth over the past few quarters have been lagging its peers, Trussell added. There are concerns that Costco's digital platform is underperforming in terms of price perception, innovation and fresh food, which poses a "meaningful disadvantage" over the longer term.

Also, grocery has always been an important competitive moat for Costco and Amazon.com, Inc. AMZN's acquisition of the natural and organic grocery chain Whole Foods Market, Inc. WFM merely adds to the already tough competitive pressure.

The grocery proposition value of Costco's peers could also threaten Costco's membership renewal rate, which comes at a difficult time when membership growth of 3.6 percent in the third quarter was the lowest since 2010.

Bottom line, while Costco remains a "relative winner in retail" the aforementioned concerns should prompt investors to move to the sidelines.

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