COST – Market expectations are for Uniform ROA to reach new peaks, but management may be concerned about margins, costs, and international stores

October 26, 2020

  • Costco Wholesale Corporation (COST:USA) currently trades at a historical high relative to UAFRS-based (Uniform) earnings, with a 37.7x Uniform P/E. At these levels, the market has bullish expectations for the firm, but management may be concerned about gross margins, warehouse and pickup costs, and international store growth

  • Specifically, management may lack confidence in their ability to keep within their 2021 capex guidance range, sustain gross margin growth, and maintain member household and cardholder growth. Moreover, they may have concerns about the coronavirus impact on margins, additional warehouse costs, and the current pace of international store growth. In addition, management may be exaggerating the strength of their discretionary nonfood categories, club usage recovery, and their merchants’ ability to pivot and add new items. Furthermore, they may be downplaying concerns about the costs of pickup and competition in Canada