Why Costco's Strong Quarter Got Discounted on Wall Street

MarketsMotley Fool

Costco (NASDAQ: COST) has, for some time, been one of the better stories in the retail world, and the first-quarter results it delivered in many ways continued that trend: It beat profit expectations, and U.S. comps were up by a strong 7%. So why did shares fall after the report?

As Motley Fool Money podcast host Chris Hill and Fool senior analyst Ron Gross explain in this segment, it primarily comes down to light international comps, and fears of the impact that tariffs and the Trump administration's trade wars will have on the company. They also discuss what the company is doing right, and why discount retail broadly is doing well.

Continue Reading Below

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

10 stocks we like better than Costco WholesaleWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Costco Wholesale wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of March 1, 2019

This video was recorded on May 31, 2019.

Chris Hill: Third-quarter profits for Costco came in higher than expected, but shares falling a bit on Friday. Same-store sales in the U.S. were up 7% Ron. That's strong!

Ron Gross: Very impressive! I think what's going on with the stock is disappointment over membership fee growth, comps were just a little bit light, especially international, U.S. was strong, and the uncertainty surrounding tariffs and what that could mean. They did make some comments there about having to maybe resource some of their items from different areas around the globe. I think that all has people a little bit shaky.

But it was a solid quarter, especially when you account for the fact that they sold a $400,000 ring. I didn't even know they sold $400,000 rings, but look it up. They sold one during the quarter. Overall revenue up 7.4%. 7% gain in comps, as you said, in the U.S. But in Canada, only 1%, and 1% overall internationally, mostly hurt by the strong dollar. Won't penalize them too much for that. E-commerce up 22%, always important for folks like Costco.

Hill: In general, May has been a rough month for retail. But I was struck this week by the performance of the discount retailers. We saw results from Dollar Tree, Big Lots, both those stocks up after their latest reports. Dollar General hitting a new all-time high. You go back over the last five years, both Dollar General and Dollar Tree have beaten the market. They're really executing well at those companies.

Gross: Very strong performance out of all those types of dollar stores, those discounters. Dollar Tree was the one that was struggling because they have Family Dollar as well, which was always the weak link there. They had acquired them back in the day. And then Starboard, the activist investor, came on board and said, "You have to sell them, you have to get your house in order." They said, "We're not going to sell them, but we're going to make a lot of moves. We're going to close underperforming stores, we're going to remodel." That firmed them up nicely. Those stores continue to put up comp sales that are just impressive. They're executing well.

Chris Hill has no position in any of the stocks mentioned. Ron Gross has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.