'Amazon Fears' Are Plaguing Costco, BMO's Retail Analyst Says In Downgrade Note

Analysts at BMO Capital Markets' bullish stance on Costco Wholesale Corporation COST no longer applies due to Amazon.com, Inc. AMZN's grocery ambitions.

BMO's Kelly Bania downgrades Costco's stock rating from Outperform to Market Perform with a price target lowered from $185 to $160 as "Amazon fears" will overshadow the wholesaler's "strong fundamentals." In fact, this was most evident after the wholesaler reported its June metrics. Despite reporting an "impressive" sales metrics for the month of June, investors pushed Costco's stock lower by 2.5 percent in the past two days.

Inflation Concerns

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Moreover, the fact that Costco boasts a "significant price gap" versus Amazon doesn't matter as sentiment and fear take precedent over Costco's business regardless if this is justified or not, the analyst added. As such, a downgrade is justified because it is difficult to argue the bullish case for Costco's stock in this "asymmetrical environment."

Costco's business could experience some modest transitory gross margin pressure in the coming quarters as the company historically lags raising its prices in a rising input environment, the analyst also highlighted.

However, coupled with the current "hyper sensitivity in an Amazon-fear dominated market" there is risk that the company's gross margin pressure will merely add additional pressure to the stock. But on the other side, this would provide a better re-entry point for investors as the analyst's price target still implies upside even from Monday's levels.