How Costco Is Weathering Amazon's Effect

 | Sep 06, 2017 | 7:00 AM EDT
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Late last week, while many were trying to squeeze in the last few days of summer vacation, Costco Wholesale (COST) reported better-than-expected August sales, again proving that despite Amazon-related (AMZN) fears, this bullpen name continues to gain consumer wallet share. Digging into the August report in full, Costco's comparable domestic net sales rose 7.3% year over year for the four weeks ending Aug. 27, while the Canadian and international business grew more than 8% and 6%, respectively, year over year.

Even after we strip out the impact of gas prices, which can be volatile, and foreign exchange, Costco's domestic, Canadian and international segments rose more than 6%, more than 4% and more than 6.5%, respectively, compared to year-ago levels, bringing total company sales nearly 6% higher.

As we like to say, context is key and that means comparing Costco's August sales to those of the last few months. In doing so, we find confirmation of our view that Costco continues to deliver compared to those Amazon-related concerns that have weighed on its shares over the last several weeks. In fact, over the last three months, Costco's comparable sales strengthened, climbing a reported 6% in June, 6.2% in July and 7.3% in August.

Now let's add one more layer to the mix -- the impact of newly opened warehouses. Over the last three months, Costco opened nine new locations to bring its total to 741. As impressive as that might be, the year-over-year comparisons are even more daunting -- during the three months ended August 2016, the company opened seven new locations that brought its total to 715. In other words, year over year ending August 2017, the company averaged nearly 4% more locations for trailing the three-month period. Factoring those additional locations into the sales mix, Costco total sales for the period rose 8.1%.

That doesn't sound at all like the pain we are hearing from regular bricks-and-mortar retailers, and especially mall-based ones. Yet COST shares are off 12.5% over the last three months. Let's remember, too, that with each new location, Costco grows its higher-margin membership-fee income stream, which is a key driver in earnings-per-share growth.

So what's holding us back from adding COST shares to the active portfolio?

While we like COST from a fundamental perspective, our threefold investment approach -- fundamentals, technical and quant -- means we have two other factors to consider. Right off the bat, COST shares don't make the cut given the current C rating awarded by TheStreet Quant Ratings, which means we are in a holding a pattern until they are upgraded to at least a B- or better.

From the technical side of this three-part equation, while the shares remain under the 200-day moving average, they have recently put in a triple-bottom, which we find potentially bearish. Our technical preference would be for the shares to close the gap on the August high of $160 before revisiting the shares for the active portfolio. We'd also note there is clear resistance to be had for the shares at $170, which could restrict potential gains.

(This commentary was sent to subscribers of Trifecta Stocks on Tuesday. Click here to learn about this long-only model portfolio.)

-- Chris Versace and Bob Lang are co-portfolio managers of Trifecta Stocks.

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