Costco Beset by Law of Large Numbers

 | Dec 12, 2013 | 10:00 AM EST  | Comments
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What's wrong with Costco? Year-to-date the stock has under performed the S&P 500 substantially. Costco (COST) is up about 16% vs. 21% for the S&P500. Heck, Costco's stock is getting beaten silly by grocery chain Kroger (KR), which is up 56%.

You'd think Costco would be rockin', right? Americans are broke and need 50-gallon tubs of mayonnaise to make ends meet. Rich people go to fancy places like supermarkets and buy small jars of mayo. What gives? Have Americans lost their appetite for Costco?

Costco reported a disappointing first quarter on Wednesday. The company reported $0.96 per share on $25.02 billion in revenue. The Street had expected $25.44 billion and $1.02 in earnings.

While the disappointing earnings had some effect on the stock, the stock really began its decline back on December 5. COST reported first quarter total same store sales of 5%. While that sounds good, in the same period last year, the company did a 6% comp and the year before Costco managed a 7% comp.

It looks like the law of large numbers is catching up with Costco. Revenue growth is clearly slowing down. In fiscal year 2011, the company grew revenue 14% year-over-year. The next year, revenue grew 11% and last year the company eked out just 6% revenue growth.

For fiscal 2014, investors have their hopes pinned on an 8% top line. But when you figure in a 5.5% first quarter, the back half of the year needs to be pretty great. In fact, the third quarter and the fourth quarter have to post an average growth rate of 8.8% to hit the consensus estimate. While it's entirely possible, last year the company only managed an average 4.3% growth rate in the back half of the year. To be a bull on Costco, you have to assume growth picks up during the rest of the year.

It seems consumers have slowed their purchases of bulk items. Buying in bulk requires a major outlay of cash. Giant packs of toilet paper come with a loan application nowadays. Since same store sales are slowing, it's clear tightfisted Americans are staying out of Costco.

If the trend doesn't reverse itself soon, you'll be able to buy as many as Costco shares as you want at rock bottom prices.

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