Costco is a retailer of warehouse clubs that offers memberships that permit customers to shop in its stores, which offer low prices on a constrained selection of goods. It is what is referred to as a “consumer staples” retailer; the warehouse club sells food and drink, home goods, and personal care products. It was a bad time for the sector as two major retailers, including well-known warehouse club Costco, suffered back-to-back disappointing earnings reports. There are worries about Costco stock being overpriced.
Even after accounting for the most recent share price decline, Costco still has a price-to-earnings ratio of 34.6, which is nearly twice the S&P 500 and makes it one of the priciest brick-and-mortar retail companies.
Walmart’s stock price fell 11.4 percent and then another 6.8 percent to $122.42 as a result of lower-than-expected earnings. Then Target reported first-quarter earnings that were significantly below expectations, which resulted in a 24.93 percent decline in the stock price to $161.61. Higher fuel and labour or compensation costs were major reasons given by both retail behemoths for missing earnings projections.
Value of Costco stocks has been impacted by inflation
The stock decline hasn’t gotten much attention from Costco yet, but The Motley Fool points out that the retailer is anticipated to release its quarterly earnings within the next two weeks. According to CNBC, Costco acknowledged the effects of inflation in a May 2021 conference call about its third-quarter earnings that year, and it seems the problem hasn’t been resolved.
The rest of the retail industry, which is impacted by many of the same inflation-related worries, supply chain problems, and weakening consumer demand, was negatively impacted by these two first-quarter earnings disappointments. Despite a slowdown in inflation, it is anticipated that food prices will continue to rise. Shares of Costco stock closed at $429.40, down 12.45%, while trading volume surged to more than 9 million shares, far exceeding its usual 2.6 million share trading volume. Costco stock price has fallen by the most in more than two years at this point.
Due to its ability to serve customers’ needs while they remained at home, Costco fared reasonably well in terms of business performance during the COVID-19 pandemic. The company managed to stabilize prices for customers while retaining its 113 million members and reducing inflation by absorbing higher costs on many items. However, Investors point out that inflation is also the cause of declining Costco stock price.
Costco needed to adjust for inflation, as evidenced by the fact that some food items now cost more. On a September analyst conference call, Costco Chief Financial Officer Richard Galanti said of rising labour and transportation costs, “We can’t hold on to all those.” “A portion of that must be transferred, and it is. We approach it with pragmatism.” Costco is one of many companies that produce consumer staples that appear to be having trouble with inflation and food shortages.
Costco stock price was impacted by a false rumour and valuation issues
An unfounded rumour that Costco planned to increase the cost of its popular hot dog and soda combo by $1 to $2.50 due to inflationary concerns may have also contributed to some of the increased trading volumes. The hot dog combo has been available for the same low cost since it was first introduced in the 1980s, so that would have been major news indeed.
Alsor read: Sam’s Club Versus Costco: Who Wins The Duel?