Shares of the warehouse club retailer Costco (NASDAQ: COST) are down about 21% from the 52-week high despite the strong momentum in its comparable sales. Inflation, supply headwinds, and valuation concerns are why COST stock has witnessed a pullback.
The tough macro environment, supply concerns, higher raw material and labor costs, and pressure on consumer spending pose a challenge for Costco. However, its value offerings, ability to defend margins, benefits from Costco Logistics solutions, and high membership renewable rate (92.3% in the U.S. and Canada and 90% worldwide) bode well for growth.
Deutsche Bank analyst Krisztina Katai acknowledged Costco’s solid “track record of operational excellence and the continuing string of strong core comps.” However, Katai recommends a Hold on COST stock. The analyst believes that Costco’s “valuation is fair at current levels.”
While Katai remains sidelined, most Wall Street analysts believe Costco’s premium valuation is warranted given its strong growth.
Atlantic Equities analyst Daniela Nedialkova recommends a Buy on COST stock. Nedialkova sees the recent pullback as an opportunity to buy Costco stock. Moreover, the analyst expects the solid momentum in Costco’s comps to offset the gross margin headwinds.
Including Nedialkova, COST stock has received 17 Buy recommendations. Meanwhile, three analysts have rated it a Hold. Overall, on TipRanks, COST stock has a Strong Buy consensus rating. Moreover, the average Costco price target of $579.95 implies 19.7% upside potential.
Looking at hedge fund activity, hedge funds increased their holdings in Costco stock by 428.6K shares in the last quarter. Overall, COST stock sports a maximum Smart Score of 10 out of 10 on TipRanks.
Costco’s strong comparable sales growth, high membership renewal rate, and relatively consistent margin performance show the strength of its business model. However, investors should take caution as cost and supply headwinds could pose challenges.