Do you sell the stock of Costco (COST) because it's trying to entice more people to its stores even if it costs them a very small amount of gross margin? Do we jettison the stock of one of the most marvelous retailers in history because we think that its attempt to widen the value gap versus its competitors has created an untenable level of promotion that makes it so the stock's not worth owning here?
That's the kind of thinking that I believe is pervasive this quarter and why the stock is down despite some impressive same store sales numbers. Any company that gets to these numbers along with no increase in gross margins sees its stock punished and any company that actually takes a gross margin hit no matter how small, and in the case of Costco we are talking about a measly 28 basis points, triggers instant, repeated, selling.
I get how difficult it can be for an institutional shareholder that's trying to game the group when she sees Costco not blow away the numbers. The company's previous record means nothing to that kind of investor. She asks "why do you need to own shares of Costco which trade at 29 times earnings with a gross margin "problem" when you can own shares in Burlington Stores (BURL) which increased its gross margin and sells at 23 times earnings even after it stock rallied 10 points yesterday"?
Or why not just go buy Lululemon (LULU) which increased its gross margins by 250 basis points and saw revenues grow 25% and it doesn't even have a full time CEO yet! It's true that Lulu is more of a health and wellness story than a retail story but an institutional shareholder wants to own a couple of retailers at all times to stay weighted or overweighted with a red hot group, and she doesn't stop to think - nah, that's more of a health and wellness play. It's a darned retailer.
But before I would kick Costco to the curb I would point out that it had 9.7% comparable store sales gains, and 7.7% gains ex gasoline and those are extraordinary numbers for a now ancient retailer.
Costco isn't an Ulta (ULTA) , which, in a bit of a downer call last night, talked about some weaker categories including a "persistent challenge in prestige cosmetics," something that's quite a surprise given how well Estee Lauder (EL) is doing.
It certainly isn't Dollar General (DG) which talked about tougher comparisons ahead and a negative comp for the month of April, or Dollar Tree (DLTR) which had disappointing numbers including an alarming 30 basis points hit from shrinkage, suggesting that there's way too much shoplifting, not that any shoplifting is good. No wonder those two stocks lost 9% and 14% of their value, no doubt an overreaction, but these were numbers that suggested that customers are trading up and out of this group. I know that weather did play havoc with their seasonal merchandise - they got caught with too much of whatever they were featuring in April -- but these stocks are trading as the economy is just plain too darned strong to own them. In fairness to them, though, no analyst put that fear into a form of a question on their calls.
But let's contrast the individual investor with the institutional investor. I think the individual investor is not going to penalize Costco for a itsy-bitsy margin degradation. The store fleet is growing, the incredibly lucrative card memberships - the ones that really generate the profit - are still advancing rapidly, the e-commerce channel burgeoning with heavy merchandise that is now making hundreds of millions of dollars for them. I just think that Costco had spoiled people again with a higher share price going into the number, as it is up 20 points from last year at this time. It does seem that every time you get too comfortable with Costco's progression something happens that the institutional investor freaks out about that can -- and often does -- cause the individual investor to panic.
I would say this, though. Of all the retailers I have covered this week, the one I think that's being thrown out that shouldn't be is Costco. I think it feels like Kohl's (KSS) when it dropped to $60 two weeks ago even as it "did" the number.
Or to put it another way: only a real sourpuss would pan this Costco quarter but we have hundreds of institutional sourpusses running money these days. Let them panic, not you. Was it Costco's best quarter ever? No. But the best time to buy the stock of Costco is NOT when it's the best quarter ever. It's when it's one of the weaker ones. That's your chance and that's exactly what you got last night, the chance to get in today when, most likely on Monday, the institutions forgot why there were selling and new ones start buying Costco's stock all over again.