Costco And Kroger Stocks Present A Big Opportunity

  • Costco and Kroger both missed estimates in their latest quarterly earnings releases.
  • The main reason was lower gas prices.
  • However, both remain on track for organic growth.

Costco (NASDAQ:COST) and Kroger (NYSE:KR) both fell hard after earnings last week, providing a big opportunity for smart investors.

Costco saw same-store sales rise 5%, and gross margins ticked up to 11.2%, but profits were down 8.7% from a year ago at $524 million or $1.24/share, from $598 million or $1.35/share a year earlier. Revenue came in at $28.17 billion, up 2.7%. Analysts had been expecting $1.28/share in earnings and $28.58 billion in revenue.

The pre-earnings whisper number was $1.30/share. This sent the Costco stock price down by $4 in early trade, although most of that was recovered by the end of the day, but shares fell another 70 cents on March 4, leaving them $1.9 below the pre-earnings close.

It was the same story at Kroger. Same store sales excluding fuel, were up 3.9%, excluding the newly-acquired Roundy’s chain, and operating expenses as a percentage of sales fell. Earnings came in at $559 million, 57 cents per share, on revenue of $26.15 billion, against earnings of $518 million, 53 cents/share, and revenue of $25.2 billion a year earlier. 

Still, analysts had been expecting earnings of 72 cents/share so the shares fell a full 7% during the day after to close at $37.81, and fell another 20 cents overnight.

This led to headlines like “slowing same store sales” at Costco, and "demand wanes from wealthy shoppers," as Kroger results were called disappointing.

But it was the analysts who were wrong, not the management, in either case.

When oil prices fall, total revenue declines. When profits are imported in the face of a strong dollar, the amount being reported drops. These are obvious points anyone who understands economics should know by heart, yet it was missed by analysts of both stocks.

The fact is, investors in both stocks should do what Ted Cruz suggested Donald Trump do in their Thursday debate – relax and breathe. Kroger’s same-store sales growth continues to exceed that at Walmart (NYSE:WMT), which is up nearly 8% so far in 2016 while Kroger is down 9.5%. Costco is continuing to grow, and is opening new warehouses that are just as crowded as their older stores, and it faced very tough comparisons from an outstanding 2014.

Retailers are not tech stocks. Their margins are wafer-thin, and they sell at a fraction of their sales. At its closing price Friday Kroger stock was selling at 33 cents for each dollar of revenue, Costco stock at 57 cents. These are bargain prices for companies that continue to grow at good rates.

Kroger will continue buying other retail chains and running them well. Costco will continue to open new stores and prosper. When you see weakness like this you can buy stocks like these with confidence.

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Author's Disclosures & Disclaimers:
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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Comments on this article and COST stock

user profile picture
How do you state that Costco is a bargain at $0.57 for each dollar in revenue? What is your basis for this? Same goes for Kroger. How does KR compare for cost of shares per revenue versus it's peers?

This so called analysis is seriously lacking substance.
2 reply
user profile picture
As soon as the author quoted Ted Cruz and Donald Trump I knew this would not be worthwhile.

This is basically an opinion piece; not stock analysis
Do share this awesome post