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 fiscal-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 12 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 a year.
D.A. Davidson analyst Michael Baker said at the time of the increase that the move would likely add around $377 million in total revenue in the next two years and generate an annual profit boost of around $189 million.
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However, other changes the group made over the summer, including the scanning of membership cards at store entry points, may have blunted sales gains over the three months ended 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 earnings report, which is slated for after the close of trading Thursday.
"Key catalysts are now in the rear-view 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 54 times forward [earnings per share], a multidecade high," he said. "Therefore, we downgrade Costco and will look for a more attractive reentry point."
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Wall Street expects Costco to post a bottom line of $5.08 a share, a 4.5% increase from the year-earlier period, with revenue 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, a move that would still leave the stock with a six month gain of around 25%.
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