Costco Wholesale Corporation (NASDAQ:COST) is one of Jim Cramer’s favorite stocks, as even though the shares are down by more than 5% over the past year, the CNBC TV host has continually expressed faith in the firm. However, in his morning appearance on September 3rd, Cramer appeared to take a different tone as he wondered whether shifting shopping trends for younger users and the rise in discount stores were enough to shift his opinion about Costco Wholesale Corporation:
“This anything, it had the curse of being 49 times earnings, which is the level that the late Charlie Munger used to say he can’t pay for anything. Now I have to tell you that I’m beginning to wonder whether this is the Costco of old. I like going to Costco very much, we’re not seeing the reups of these people who buy their cards online. I don’t want it to be a generational thing where my generation is Costco and the newer generations don’t look at it like that. But if we were talking about Walmart right now, Walmart is down very badly too. I regard Costco as great value. I’m just wondering whether the great value isn’t in these dollar stores. You don’t want to go to dollar stores, again I’m going to reiterate, they shrink their packages, so you think you’re getting a good deal. . .Costco, I’ve owned it for the trust forever, it’s just not, it just feels like it’s not the Costco of old. I don’t know. When Richard Galanti stepped down, he was the CFO for more than 35 years, I’m just worried. It seems to have lost the, it’s difficult, because it’s retail so you can’t say mojo. They’ve got to resonate more with young people.
“Costco’s little more long term. I don’t understand why younger people don’t, who get online, don’t seem to be interested. I think you have to go to the stores though, in order to recognize the greatness of Costco. But if you’re not going to the store then you may not recognize it as much.
And I wonder whether Costco and TJ are cocky. Because that is the kiss of death in retail. Because the moment that you think you know what you’re doing, are you kidding me.”
However, while Cramer might be worried about the shifting trends, Costco Wholesale Corporation did report strong net sales for its fourth quarter. Its fiscal fourth quarter net sales jumped by 11.3% to $93.9 billion. Additionally, the firm’s membership fee income, which is similar to recurring revenue for software firms, grew by 10.7% to $1.37 billion in the fourth quarter. On the digital front, Costco Wholesale Corporation’s fourth quarter saw digital comps jump by 19.5% to indicate that the firm was making inroads into the channels Cramer discussed. However, the 19.5% growth was a slowdown over Q3’s 21.5%.
Yet, at the same time, the broader inflationary environment also affected Costco Wholesale Corporation in its third quarter. The firm’s merchandise margins contracted by 21 basis points to 11.04%. Additionally, the fact that Costco Wholesale Corporation hasn’t increased its membership fee in years can point towards management fears about a membership churn. The worries are compounded by the fact that worldwide renewal rate is static at 89.7% while the rates for US and Canada of 92.2% marked a modest ten basis point jump in Q2.
Considering the overall modest growth and worries about membership strength, Costco Wholesale Corporation’s forward P/E ratio of 40.32, which is higher than Walmart’s 36.5 does raise concerns about a high valuation. Compared to TJX’s 24.39, the ratio makes the membership-based retailer quite expensive. As for the hedge funds, sentiment in Q2 was relatively unchanged as 104 funds out of the 1,006 tracked by Insider Monkey had held a stake in Costco Wholesale Corporation. The figure was 107 out of 1,022 funds in Q1. Short interest as a percentage of float is unremarkable. Notable names that exited the stock in Q2 included Renaissance Technologies and Two Sigma Advisors.
READ NEXT: Jim Cramer Draws the Line on NVIDIA in China: Why National Security Comes First and Jim Cramer Defends His Dell Stance as Investors Complain About Missing Out.
