Costco Wholesale: Looking Beyond The Special Dividend

NORTH BRUNSWICK TOWNSHIP, NJ, UNITED STATES - 2018/08/14: Costco Wholesale store in North Brunswick Township, New Jersey. (Photo by Michael Brochstein/SOPA Images/LightRocket via Getty Images)

Costco Wholesale Corporation (NASDAQ: COST), with a gain of nearly 18.4% YTD (compared to approximately 14.5% in S&P 500), trades with more than 50 percent premium to the forward P/E of its peers. It comes as COST’s FY19 Q2 EPS beat consensus estimates backed by 30 bps expansion in gross margins amid lower gasoline prices and slow revenue growth.

For the remainder of the year, COST is set to witness an aggressive expansion in its store count, while store traffic could increase amid rising inflation in gasoline, which is cheaper there. Meanwhile, the robust private-label sales contribution to the top line could revive the company’s sales growth, which, helped by a strong balance sheet, brings hopes of a special dividend. However, COST has raised its minimum wages for the second consecutive year despite pressure on margins from price competition among peers. Against this backdrop, the premium of the company’s forward P/E could only get moderate in the medium term.

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Disclosure: I/We have no investments in the stocks mentioned in the above article and don’t intend to open any within the next 72 hours. I wrote this article for myself, and it expresses my opinion. I/We receive no compensation, nor do I/We have any business relationship with any companies whose stocks are mentioned in the article.

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