Costco's Competitive Pricing Moat Widened In Q1

Costco Wholesale Corporation (NASDAQ: COST) reported after Wednesday's market close its fiscal first-quarter results, which failed to impress Karen Short of Barclays.

Sidelined

In a research report on Thursday, Short maintained an Equal-Weight rating on the stock with an unchanged $158 price target, as the big box retailer's adjusted earnings per share of $1.17 fell short of her expectations of $1.19 per share and the consensus estimate of $1.20 per share.

Justification For Rating

Short noted that Costco's adjusted earnings per share miss was due to a higher than expected SG&A and was only partially offset by an improvement in gross margins.

The analyst highlighted that management acknowledged its competitive pricing moat continues to widen and traffic may have troughed. Management hopes to attract additional business through its branded Visa Inc (NYSE: V) card, but Short believes it is unclear how this will yield benefits, especially as the company has been reluctant to invest in convenience.

"In our view, COST may need to eventually invest more in service/convenience areas given the proliferation of online food purchasing options," Short wrote. "Given this changing competitive dynamic, we believe comps may not re-accelerate even with the benefits of the new co-branded credit card, something we believe is necessary for the stock to command a higher multiple."

At last check, Costco shares were up 3.5 percent at $159.23.

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