© Reuters. Cowen cuts Costco (COST) as gas profits shrink
By Michael Elkins
Cowen reiterated an Outperform rating on Costco Wholesale Corp. (NASDAQ:) and cut the price target for the stock to $600.00 (from $650.00) based on the company’s lower gross profit from gas sales. Costco continues to be Cowen’s “best idea in 2023” due to the company’s low-priced and curated assortment amid inflation, sticky membership model, and consistent positive traffic frequency.
However, based on Cowen’s analysis, if lower gas price trends continue from current rates, this could have an impact to EPS of (40c)-(50c) or a (2%)-(4%) headwind. Costco’s gas business was 14% of FY22 sales and based on current trends prices could be (6%) Y/Y lower. Analysts estimate gas revenues could decline (9%) Y/Y while gross profit dollars decline (12%) Y/Y.
They wrote in a note some key strategies that they think may “offset lower gas revenues.” Those strategies include: “reinvestment of potential membership fee increase for greater value offerings — we believe this is likely in the next 6-12 months; COST’s high frequency oil purchases, which both protect margins and drive flexibility; outstanding and consistent store traffic as 50% of gas sales are followed by an instore visit.”
Shares of COST are up 2.97% in mid-day trading on Monday.
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