Costco Wholesale Corp. (COST) stock finished Friday's trading down 5.6%, the largest drop the shares have seen since October 2017.
The precipitous plunge is being felt as a result of concerns from the market on its technology and operations controls, tariffs and margin squeezes, and worries that the company's valuation might be due to fall back to earth.
The first potential smoking gun for the stock's drop Friday that experts pointed out to Real Money was the company's reported data breach, which it referred to as a "material weakness."
"My guess is that the market is worried about the data breach," Mary Epner, President of Mary Epner Retail Analysis told Real Money in an interview. "Whenever this happens I'm reminded of Neiman Marcus and what a big deal that was."
She said that investors simply don't like to hear this kind of news, especially from retailers.
"The issues had to do with internal user access, so people within IT or contractors," Costco CFO Richard Galanti explained. "I can tell you with all the look backs that we have done and then our outside help has done, has found no issues whatsoever in terms of misstatements or breaches."
Analysts at the very least found this an adequate explanation.
"Without much further in the initial release, we thought that this issue could potentially present further risk," Deutsche Bank analyst Mike Baker wrote in a note on Thursday evening. "On the call, we think management did a good job mitigating these concerns as remediation efforts are underway and they don't expect any financial results to be restated.
Tariffs and Margins
Epner also highlighted concerns on tariffs and margins as a portion of the rationale for a stock drop.
"This is a company that relies on a lot of imports," she told Real Money. "If they start to get hit with big tariffs, that could be a kiss of death."
She explained that for bulk, discount retailers, the margin is often smaller and thus precious.
This is especially so for Costco, given gross margin in the quarter was lower year over year by 35 basis points for the company.
"The drag [on earnings] was the result of a softer than expected gross margin and the investment in labor," Wells Fargo senior analyst Edward Kelly pointed out, citing margin as a significant factor tempering his share price target.
He maintained a "market perform" rating.
The squeeze on margin and the impact from tariffs was also highlighted by J.P. Morgan analyst Chris Horvers as a reason he was trimming his price target to $252 from $255. Horvers nonetheless maintained his "overweight" rating for the stock.
All Good Things
Some experts were more muted, noting that the company had made a remarkable run over the course of 2018 and that profit-taking may have been in order on earnings.
"Costco tends to do this," Gordon Haskett Research Advisors Senior Analyst Chuck Grom told Real Money. "The stock has traded down more than half of the time its reported in the past few years."
According to FactSet data, the stock has traded down the day after earnings on four out of the last five presentation dates. This has not hampered the stock's nearly 40% gain since last year.
"The stock is up 23% year to date and it's near the high end of its valuation range," Grom explained, noting that he would expect some pullback after such a run.
Real Money contributor James "Rev Shark" DePorre also pointed out that this run has left the stock with unreasonable expectations.
"COST's biggest problem is that it has an aggressive valuation and needs to keep beating estimates by a substantial amount to please shareholders," he wrote in his column. "The stock is trading with a trailing PE of 34 which means that 5% growth and a 2 cent beat just isn't going to excite new buyers."
Many analysts still believe in the long term buying prospects of the stock, as about two-thirds of analysts publishing research Friday are touting a buying opportunity, while no analysts are offering a sell rating.
Meanwhile, shareholders and traders of Costco might be looking for beers in bulk Friday evening as they nurse wounds from a stock drop they haven't felt in almost a year.