Shares of Costco Wholesale (NASDAQ: COST) fell after the warehouse retailer posted comparable sales for May that were slightly below estimates.
For a stock that’s priced to perfection like Costco, that was enough to send the stock down 3.9% as of 2:01 p.m. ET.
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Image source: Costco.
Costco’s growth slows
Costco is one of the few retailers left that reports monthly comparable sales, as others have backed away from the practice, in part because they think it adds volatility to the stock. Investors sometimes overreact to the numbers. That may be what’s happening here.
In May, Costco’s comparable sales rose 4.3%, or 6% after adjustment for fuel prices and foreign exchange. That was below its growth rate of 5.8%, or 7.9% after adjustments for the first 39 weeks of the fiscal year. Costco also said that overall revenue rose 6.8% for the four-week period ending June 1.
Those are hardly concerning numbers, but Wells Fargo said in a note this morning that those results were just below expectations of 6.2% adjusted comparable-sales growth.
Though the bank said the retailer continued to perform well, it noted its high valuation and reiterated an equal weight, or neutral rating, with a price target of $1,000.
What’s next for Costco?
Investors shouldn’t change their thesis on Costco stock based on one month of comparable sales, but today’s pullback is a good reminder of why valuation matters.
Costco now trades at a price-to-earnings ratio of 57, meaning high expectations are baked into the stock. While the business is strong, the valuation assumes that its superior growth rate will continue. However, even a moderation to mid-single-digit comps is enough to send jitters through investors, as we saw today. If Costco’s numbers disappoint again, the stock could fall further.
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Wells Fargo is an advertising partner of Motley Fool Money. Jeremy Bowman has positions in Wells Fargo. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
