The following is an excerpt from Ben Levisohn | February 29, 2016 | Barrons.com |
Shares of Costco Wholesale (COST) have underperformed the S&P 500 so far this year thanks to very volatile sales and concern around its ability to increase its membership fees. JPMorgan’s Christopher Horvers and team, however, think this period of high uncertainty will pass quickly:
Costco at a rare moment of high uncertainty with the membership fee increase hanging in the balance. As we reviewed in the January sales update, clearly Costco’s traffic trend has turned more volatile in recent months, especially since the first gas price-induced step up that started in August 2014 (to 5% from 4%) and a subsequent step down (starting Feb 2015 to 3.5%). In addition, Costco has faced incremental deflation (estimated 100-150-bp drag YOY in January). This factor has contributed to a 60-bp deceleration in average ticket since October (TVs have picked up some of the slack) vs. the prior run rate. Notably, this is excluding the detrimental impacts of FX and gas, which have been an overall drag to total comps. Add to the woes the delay in transition from American Express (AXP) to Citigroup (C) for member credit card that possibly defers the benefits (sales and margin) to 2H16. Thus, with a stock that trades on the consistency of its sales (particularly traffic), investors are rightly nervous, in our view. Most importantly, the potential MFI increase in calendar 2017 hangs in the balance. If traffic weakens further in the U.S. against easier comparisons starting in March, it becomes highly unlikely that management would raises fees. This is important given an increase could add 300+ bps to EPS growth in both of the next two calendar years.
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