Stifel Remains A Costco Bull After In-Line Q2

Costco Wholesale Corporation COST reported fiscal second-quarter results Wednesday that were generally in-line with consensus estimates and reinforced the bullish case for owning the warehouse club's stock, according to Stifel.

The Analyst

Stifel's Mark Astrachan maintains a Buy rating on Costco's stock with an unchanged $200 price target.

The Thesis

Costco's in-line Q2 report reaffirms the company's status as a best-in-class retailer, Astrachan said in a note. Here are the analyst's main takeaways after the print:

• Core-on-core merchandise — which represents 80 percent of net sales — margin rose 14 basis points after falling a few basis points in the prior quarter.
• Total company and U.S. core comp growth in the month of February rose 7.7 percent and 7.5 percent, respectively. Both of these figures were ahead of consensus estimates and imply a sequential acceleration on a two-year basis of 90 basis points and 40 basis points.
• Costco expects to gain 10 to 20 percent of the sales from Sam's Club locations that are closing. This implies a potential 0.9-percent increase, or $900 million, in U.S. sales at the 20-percent level.
• Renewal rates rose 10 basis points compared to the prior quarter, ending at 90.1 percent in the U.S. and 87.3 percent in Canada and worldwide.
• E-commerce online comp sales rose 28.5 percent in the quarter while two-day dry grocery delivery and same-day fresh delivery through Instacart remains positive-to-date.
• The company realized 21 basis points of SG&A leverage year-over-year due to strong sales growth and this trend will likely continue.
• Costco said it will invest a "small amount" in price investments but its suppliers will be investing "more," according to Stifel. This implies vendor-funded promotions will generate a higher gross margin rate for Costco and marks the first time a retailer within the research firm's coverage "explicitly admitted exacting price concessions from suppliers," Astrachan said. 

Price Action

Shares of Costco were trading lower by 2 percent Thursday morning at $183.61. 

Related Links:

Predicting Costco's Trading Action Heading Into Its Q2 Earnings Report

Costco Upgraded As Analyst Projects A Widening Competitive Moat

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