Costco rally grinds to halt on disappointing earnings

Wholesale retailer Costco sank 4.3 per cent to $170.26 on Friday, as disappointing earnings outweighed optimism over its increased membership fees.

It curtailed a long rally in the company’s stock — up 18.6 per cent since the US election — and still outperforming the S&P 500, which has risen 12 per cent over the same period.

Its earnings fell to $1.17 for the fiscal second quarter from $1.24 per share a year ago, missing analysts’ expectations of $1.36.

Despite the dip, analysts have maintained a positive outlook, in part due to an increase in membership fees expected to boost the company’s bottom line.

Costco said on Thursday that it would increase the price of its Goldstar membership by $5 to $60, while executive membership fees will increase $10 to $120, going into effect June 1 for the company’s 35m members. The company last increased fees in 2011.

“It is a different kind of retailer and it is one of the few places where you pay to shop,” said Oliver Chen, analyst at Cowen & Co. “And they have been experiencing positive store traffic. Physically people want to go to these stores.”

The frequency of people attending Costco stores in the US increased 3 per cent for the quarter. That is in contrast to other retailers, in particular US shopping centres, which have struggled with declining sales figures and lower foot traffic as more people turn to shopping online.

As earnings season draws to a close, Morgan Stanley analysts note that, unlike recent years, companies’ forward guidance has had little bearing on its stock price, with both negative and positive guidance seeing positive reactions in the market.

“Unlike for 2016, stocks that issue guidance for 2017 better than consensus expectations are being rewarded, while those missing guidance expectations are also being rewarded,” said the analysts’ report.

Aggregate earnings outpaced expectations by 1.9 per cent, the analysts added, with energy, real estate, discretionary and technology sectors delivering the most upside.

The earnings outperformance is due in part to negative earnings revision leading into the reporting season — a common theme in which companies play down their earnings ahead of time to make it easier to beat analyst expectations.

By the close of New York trading, US stock markets had secured their sixth consecutive week of gains.

The benchmark S&P 500 and Dow Jones Industrial Average were flat at 2,383.12 and 21,005.71, respectively. The tech-heavy Nasdaq Composite gained 0.2 per cent to 5,870.75.

That comes after continued inflows into US equity funds. State Street’s SPDR S&P 500 exchange traded fund reversed its fortunes this week, receiving its biggest one-day inflow of $8.2bn since the end of 2014.

It took the ETF’s year-to-date flows into the green, having struggled with outflows at the start of the year.