At Costco, Lots of Pie but No Special Dividend. Why the Street Didn’t Like the Earnings.

Investors in Costco have been looking forward to a special dividend, but management didn’t announce a payout on Thursday. (FREDERIC J. BROWN/AFP via Getty Images)

Key Points

• Costco’s stock is down 4.4% this year, despite strong earnings and sales, contrasting with the S&P 500’s 17% gain.
• Declining membership renewal rates and slower global traffic growth, are concerns for investors.
• Analysts believe a turnaround for the shares is one to two quarters away.

Costco Wholesale has a problem.

The company continues to be one of the strongest retailers in the country, gaining market share and increasing its sales and profit at a healthy clip. Fiscal first-quarter earnings topped expectations—the 4.5 million pies Costco sold ahead of Thanksgiving likely helped—and plans to open about 30 stores a year remain firmly on track, positioning Costco’s share gains to continue.

Yet Costco shares are down 4.4% this year, compared with the S&P 500’s 17% gain. Shares were 1% lower Friday morning, signaling that even though the results were better than expected, pessimism about the stock prevails, at least for now.

The downbeat reaction stems from a few factors. For one, Costco’s lofty valuation—the stock trades at about 43 times the per-share earnings expected for the next 12 months—indicates that investors have high expectations for the retailer. That means it can take results that far outstrip expectations, rather than meet forecasts, to lift the stock.

Earnings per share of $4.50 did handily beat estimates for $4.27 a share, but revenue was $67.3 billion, just a hair above what the Street was forecasting. Barron’s cited the valuation in a successful bearish call on the stock last December.

Investors were also looking forward to a special dividend, which failed to materialize this quarter. Costco’s strong cash position has allowed the retailer to be extra generous with shareholders, issuing special payouts every two to three years.

The company announced a $15 special dividend in December 2023 to be paid out the next month. It also issued a $10 dividend in December 2020, a $7 dividend in May 2017, and a $5 dividend in February 2015. Based on that pattern, another special payout is due.

It could give the shares a boost when it does materialize. Rupesh Parikh, an analyst at Oppenheimer, made that point in a research note on Friday, saying a stock split could lift the shares as well.

Declining membership renewal rates are also a worry. The renewal rate was 89.7% in the fiscal first quarter, down from 89.8% in the fourth quarter. Costco’s management team attributed the decline to more people signing on for memberships online, noting that these members renew at a slightly lower rate, on average. Executives said this quarter’s decline was smaller than anticipated because Costco rolled out marketing aimed at people whose memberships would soon expire.

Slower growth in the number of visitors to Costco stores is weighing on the stock as well, says Evercore ISI analyst Greg Melich. Global traffic rose by 3.1% year over year this quarter, down from 3.7% in the prior fourth quarter and 5.2% in the fiscal third quarter.

“When you look at month by month, there’s definitely been some lumpiness in the individual monthly sales results that we’ve posted, but a lot of that has been to do with, whether it was uncertainty around tariffs one month to another, or port strikes that we had to cycle,” said Gary Millerchip, Costco’s chief financial officer, on an earnings call Thursday.

Given those concerns, most analysts think a turnaround for the shares is still one to two quarters away. Phillip Blee, an analyst at Wiliam Blair, predicts that shares could “remain stagnant” until the spring.

“We expect shares to remain range-bound through the second fiscal quarter, as comparisons remain difficult and the company continues to absorb elevated compensation costs,” he wrote in a research note Friday.

Meanwhile, long-term investors may find that this is a good time to buy the stock.

“Historically COST is good to buy following periods of sideways, or in this case, downward, corrections,” Melich writes.

Zhihan Ma, an analyst at Bernstein, agrees, saying the recent pullback in the shares make the balance between risks and potential rewards “very compelling.” She also sees several potential positive factors next year, including the much-awaited special dividend. Costco could also be one of the beneficiaries of the larger tax refunds expected to result from this summer’s One Big Beautiful Bill.

William Blair’s Blee adds that by the fiscal third quarter, costs stemming from higher compensation will be fully worked into Costco’s business, giving the company more leverage to trim selling, general, and administrative costs. He says that the company has the potential to keep posting comparable-store sales growth of more than 5% and to increase earnings by a percentage in the midteens.

“In our view, these dynamics, combined with ongoing execution, position the stock for upside later in the year, though near-term catalysts are limited,” he wrote.

Write to Sabrina Escobar at sabrina.escobar@barrons.com