Buy Costco Because Its ‘Special Sauce’ Is Driving Long-Term Growth - Barron's

Sgtore traffic levels “remain robust and continue to improve.”

Nicholas Kamm/AFP/Getty Images

Costco Wholesale stock was rising Tuesday morning, following an upgrade from Barclays, which argues there are about half a dozen reasons to buy the discounter.

Analyst Karen Short boosted her rating on Costco (ticker: COST) to Overweight from Equal Weight and her price target to $400 from $330.

There have been big gains in Costco’s monthly same-store sales throughout the pandemic, and Short thinks the comparisons will still look favorable in 2021, relative to many other essential retailers. Second, she thinks the factors that have driven Costco’s recent gross margin expansion are sustainable.

Short also highlights the company’s traffic levels, which “remain robust and continue to improve.” Her penultimate point is that a special dividend could soon be on the horizon. And finally, she thinks Costco might bump up its membership fees.

Those are just some of the more-immediate catalysts she sees for Costco. Longer term, she thinks the market isn’t fully appreciating the company’s e-commerce network, “a more meaningful advantage” than the stock appears to price in.

“Less tangible is Costco’s ‘special sauce’—its merchandising excellence, driven by the company's mantra of driving quality and value,” Short writes. The company’s ability to curate its products, stock desirable private-label brands, and deliver some of the so-called treasure-hunt model that has been so successful for off-price retailers, are at the heart of its appeal to consumers. “In our view, it may often be overlooked that Costco’s best-in-class presence all starts with merchandise…This leads to a best in class velocity (sales) per [product] unmatched across all of retail globally.”

Costco shares were up 1.1% to $362.43 in premarket trading as Dow Jones Industrial Average futures rose 0.5%. The shares have rallied 22% year to date. Costco reported a great quarter in late September, and while the stock fell briefly afterward, shares are bumping up against a fresh 52-week high.

Write to Teresa Rivas at teresa.rivas@barrons.com

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Buy Costco Because Its ‘Special Sauce’ Is Driving Long-Term Growth - Barron's
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