Costco delivered nearly everything you could ask for. A better-than-expected profit? Costco’s earnings beat analyst forecasts by six cents a share. Consensus-topping revenue? Total sales rose 16% to $42.3 billion, ahead of estimates of $41.6 billion. Ridiculously good sales at stores opened at least 13 months? Same-store sales rose 5.7%, if we exclude volatile gasoline prices and currency fluctuations. In this retail environment, those are surely results worth celebrating.
Or maybe not. Costco’s shares fell 6% last Friday, as investors saw flaws where they once saw perfection. They point to Costco’s gross-profit margins, which slipped to 13.2% from 13.4% a year ago, and lower membership renewal rates—retail renewals dropped to 89.3% from 89.5%. But there’s another reason Costco can’t seem to catch a break: It’s just too expensive.
After Friday’s earnings report, Costco trades at 24.5 times 12-month forward earnings. While that is well off its June peak of 31.2, it’s still 1.5 times other food and staples retailers, and well above the S&P 500’s price/earnings ratio of 19.3. Normally, that wouldn’t be a problem—Costco almost always trades at a premium—but these aren’t normal times. With Amazon at the controls, Whole Foods started cutting prices. That means everybody in the business will be feeling pressure to do the same.