A strong earnings report wasn’t enough to impress investors.
Shares of Costco Wholesale (COST -0.83%) were slipping today in spite of reporting strong third-quarter results last night. Investors seemed to believe that the stock was already fully priced coming into the report after having run up over the last year, meaning that a strong quarter was already baked into the stock price.
As of 2:38 p.m. ET, the stock was down 2.6% after trading down by as much as 3.4% earlier in the session.
Image source: Costco.
Costco’s quarter was good, but not good enough
Costco delivered another round of solid results, with comparable sales up 6.5% adjusted for fuel and currency exchange, and total revenue jumped 9.1% to $58.5 billion, ahead of the consensus at $58.1 billion. E-commerce sales rose 20.7%, showing Costco continuing to gain share in the online channel.
Costco’s profits also soared as gross margin improved from 10.3% to 10.8%, and its membership fees, which essentially go straight to the bottom line, rose by 8% to $1.12 billion. As a result, operating income jumped 31% to $2.2 billion, and earnings per share was up 29% to $3.78, topping estimates at $3.70.
What’s next for Costco?
Costco doesn’t give guidance, but the third-quarter results left little to find fault with. The company continues to execute at a high level and gain market share. However, the stock is expensive, especially for a retailer, trading at a price-to-earnings ratio of about 50, meaning that even 30% profit growth isn’t necessarily enough to drive the stock higher.
The retailer is also unlikely to maintain that growth rate over the long term, as its sales growth is more constrained by its ability to open new stores and grow sales at existing ones.
So while Costco’s competitive advantage may be rock solid, the stock seems to be due for a breather.
Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.