Despite Tepid Results, Costco's Long-Term Story Remains

We do not plan to make a large change to our $143 per share valuation for wide moat-rated

Deflation continues to pose a top-line challenge industrywide, with Costco reporting especially stiff headwinds in fresh food, gasoline, and certain electronic categories. The company’s tendency to pass cost savings on to customers quickly has accelerated some of the impact relative to Costco’s peers. For example, in November, the firm saw dollar meat sales increase 6% despite a 16% increase in pounds sold, despite wholesale-retail beef spreads that are near all-time highs (per U.S. Department of Agriculture data). We remain confident that Costco’s value proposition to its customers will improve as inflation returns across its product spectrum, as cost increases should underscore Costco’s price gaps against alternative outlets, strengthening its value proposition and driving top-line growth. In our view, the firm’s cost advantage underpins the firm’s brand intangible asset, creating a wide economic moat that protects consistent midteens returns on invested capital (15% on average since 2011; 17% average yearly projection through fiscal 2020).

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.