Costco Could Enter Intermediate Correction

Costco Wholesale Corp. (COST) reports Q4 2021 earnings after Thursday’s closing bell, with analysts expecting a healthy profit of $3.65 per-share on $61.45 billion in revenue. If met, earnings-per-share (EPS) will mark a 13% profit increase compared to the same quarter last year. The stock sold off more than 2% in June despite beating Q3 top and bottom line estimates, but recovered quickly, carving a series of new highs into September.

Impressive 2021 Sales and Revenue

The big box retailer picked up substantial market share during 2020 lockdowns and has retained those customers throughout 2021. Monthly sales reports during the quarter have hit the mark, most recently with August adjusted comparative sales growth (excluding gasoline and forex) of 9.1% vs. 8.0% in July. Unadjusted sales grew 14.2% vs. 12.8% in the prior month while Costco booked outstanding net sales of $15.75 billion, 16.2% higher than the $13.56 billion booked in August 2020.

Telsey Advisory Group analyst Joseph Feldman outlined his bullish thesis earlier in the quarter, insisting that Costco “should remain a share gainer, with its solid sales, high membership renewal rates (110 million total members), and square footage growth of LSD. In fiscal year 2022, Costco should continue to generate solid EPS growth, driven by a MSD comp, MSD-HSD membership fee income growth, healthy digital growth, and lapping COVID-19 related costs”.

Wall Street and Technical Outlook

Wall Street consensus has eased after a 47% six-month advance, with an ‘Overweight’ rating based upon 17 ‘Buy’, 4 ‘Overweight’, 10 ‘Hold’, and 1 ‘Underweight’ recommendation. No analysts are recommending that shareholders close positions. Price targets currently range from a low of $385 to a Street-high $525 while the stock will open Tuesday’s session about $22 below the median $475 target. Short-term upside may be limited, given this mid-range placement and recent share gains.

Costco has been an outstanding performer in the last decade, rising more than 500%. It topped out at 393.15 in November 2020 following a strong uptrend and carved a steep decline into March 2021. A strong bounce reached the prior peak in May, ahead of a June breakout that’s added more than 70 points. However, momentum has waned in recent weeks, setting off a weekly sell cycle that favors an intermediate correction and limited gains well into the fourth quarter.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.