Costco Wholesale Corporation (NASDAQ:COST) has started to regularly feature on Jim Cramer’s watchful radar lately. The reason is clear as the shares are down by more than 18% since their peak in May. For Cramer, the share price movement is important since not only is Costco Wholesale Corporation a part of his charitable trust portfolio but also because he has continued to defend the stock and the firm despite the weakness. In his morning appearance on September 15th, the CNBC TV host discussed the firm in the context of motor oil hoarding and price cuts:
“Now Costco raised, Costco limited, one other thing, in the last couple of years, they limited bars of gold. And I think it’s interesting to say that oil is not only the new gold, but it supplants gold, again, when you do these things, and I wish Costco had not done that, it breeds hoarding. David, if we could hoard motor oil, if some places could hoard oil and expect it trades higher, then we’re going to be in a real spiral, and I think the President’s going to be surprised, well the President doesn’t pump a lot of gas.
“I wonder if the Fed chief respects the fact, that there is a dynamic where everything could change and we would have a decent reversal and a decent reversal would make it so, I don’t know whether anybody would necessarily cut prices, except Costco, they would bring them down immediately.”
Lower prices are a major reason behind Cramer’s optimism surrounding Costco Wholesale Corporation. They are among the factors that he has previously relied on when defending the firm along with its ability to use scale to its advantage. However, in his morning appearance on September 3rd, Cramer did take a slightly different approach as he wondered “whether this is the Costco of old.”
The broader narrative for the membership retailer is whether its new initiatives and alternative growth streams justify the valuation. After all, Costco Wholesale Corporation is trading at a forward P/E ratio of 45, which is above the historical average of 34. While the valuation could be rich, it’s not like the firm isn’t growing. For instance, in August, Costco Wholesale Corporation grew net sales by 9.9% and comparable sales by 8.4%. Additionally, the 16-week sales figure marked an 11.3% growth, which was roughly similar to the 11.3% growth in its fiscal Q3.
For its high growth business, the third quarter saw Costco Wholesale Corporation grow digital same-store sales by a stronger 21.5%, which were boosted by the site and application traffic growing by 37%. Not to mention, the firm’s AI-powered personalization carousels generated $970 in digital revenue across Q2 and Q3 to indicate that the growth busineses are firing on all cylinders.
Yet, at the same time, with total Q3 revenue being roughly $70 billion, the figure is a drop in the bucket for Costco Wholesale Corporation as the primary bread-and-butter is still the physical store. Like other retailers, margins are tight with merchandise margins dropping by 21 basis points to 11.04% in Q2, with worldwide renewal rates remaining static. Several quarters have also discussed Costco Wholesale Corporation’s hesitancy to raise membership fees.
As for the hedge funds, 104 and 107 hedge funds had held a stake in Costco Wholesale Corporation in Q2 and Q1, according to Insider Monkey’s data. Short interest as a percentage of float is 1.7%.
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