Costco Wholesale shares edged lower in early Tuesday trading after a top Wall Street analyst clipped his rating on the bulk discount retailer heading into its fourth quarter earnings report later in the week.
Costco (COST) , one of the top-performing stocks in the retail sector this year, has added around $160 billion in market value over the past twelve months as its focus on aggressive pricing in a limited number of items, as well as increased efficiency in its higher-margin online division, has consistently added to bottom line gains.
The group also unveiled its first membership fee increase in more than seven years over the summer under new finance chief Gary Millerchip, taking the price of its executive card to $125 per year.
D.A. Davidson analyst Michael Baker said at the time of the increase that the move will likely add around $377 million in total revenues of the next two years and generate an annual profit boost of around $189 million.
Costco lifted its membership fees for the first time in seven years over the summer, but its $1.50 hot dog/soda combo price hasn’t changed since 1985.
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However, other changes brought by the group over the summer, including the scanning of membership cards at store entry points, may blunt sales gains over the three months ending in August, while the stock’s impressive gains have given it “little room for error” with respect to near-term performance, according to Truist Securities analyst Scot Ciccarelli.
‘Little room for error’
“The business remains strong and is gaining share across nearly all trade classes, with arguably the highest barriers to entry in retail,” he said. “However, recent changes like scanning IDs on entry and packaging adjustments to their chickens could create some sales headwinds.”
Ciccarelli lowered his rating on Costco stock to ‘hold’ from ‘buy’, while keeping his $873 price target in place ahead of the group’s fourth quarter earnings, which are slated for after the close of trading Thursday.
“Key catalysts are now in the rearview mirror, and the stock’s current valuation leaves little room for error,” Ciccarelli said.
Related: Analysts reset Costco stock price targets ahead of earnings
“Costco is up around 60% in the last 12 months (multiple up by roughly 20 turns) versus the S&P’s 30%, and it’s now trading at about 54x forward [earnings per share], a multi-decade high,” he said. “Therefore, we downgrade Costco and will look for a more attractive re-entry point.”
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Wall Street expects Costco to post a bottom line of $5.08 per hares, a 4.5% increase from the same period last year, with revenues edging 1% higher to $78.21 billion.
Costco shares were marked 0.5% lower in premarket trading to indicate an opening bell price of $912.50 each, a move that would still leave the stock with a six month gain of around 25%.
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