Costco’s (COST) shares dropped over 1% on Tuesday afternoon following a Neutral (Hold) call from DA Davidson “due mostly to valuation concerns.” This is even though the institutional equity research firm listed the wholesale retailer alongside warehouse club competitors BJ’s Wholesale (BJ) and Walmart (WMT) as collectively capable of growing their warehouse counts by about 70% from 1,460 today to 2,500.
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Warehouse clubs are membership-based, basic, and stripped-down stores that sell a limited assortment of goods in bulk at cheaper prices, with members trading convenience, such as self-service, for cost savings.
An Increasing Driver of Retail Sales?
In his assessment of the warehouse club stocks, DA Davidson analyst Michael Baker said his team’s analysis indicates that there is more room for growth, even as the three competitors have stated plans to expand their warehouse club stores. The analyst contended that the three retailers’ plans to double down on their growth strategy for this store format are ” a testament to the strength of the concept”.
The planned move also points to the fact that warehouse sales’ contribution to overall retail spending remains low, but such sales have continued to rise and capture more market share. In addition, Baker noted that key metrics such as members per club and sales per club show that the market is still far from its saturation point.
DA Davidson Picks BJ’s Wholesale as ‘Top Idea’
However, of all three, the analyst only named BJ’s Wholesale as his “top idea,” despite the retailer being the smallest of the three. Baker also reaffirmed his Buy rating on Walmart, whose Sam’s Club last week raised membership fees for the first time in four years.
The analyst’s valuation concern comes even as Costco shares have climbed about 17% year-to-date, with Bernstein noting last week that the Washington-based retailer “has a significant growth runway of another ~50+ years.”
Is Costco Still a Good Stock to Buy?
Across Wall Street, analysts’ consensus rating on Costco’s shares remains a Moderate Buy. This is based on 16 Buys, six Holds, and one Sell issued by 23 analysts over the past three months.
In addition, the average COST price target of $1,088.05 only implies about 8% upside.
