Barclays analyst Karen Short has upgraded Costco Wholesale Corp. (COST) to overweight from equal weight, noting that the warehouse club will see accelerated traffic and comps in the second half of 2017. (See also: Costco's Strategic Initiatives Bode Well for the Long Run)
Easy Comparisons in Second Half
Costco noted during its fiscal year 2016 Q4 and fiscal year 2017 Q1 earnings calls—the two quarters represent the second half of calendar 2016—that certain segment declines reported were down to unfavorable comparisons versus previous-year quarters. For instance, during its fiscal 2016 Q4 call last September, management noted that foreign exchange headwinds made its foreign earnings drop by roughly $13 million during the quarter.
President Donald Trump has been a loud critic of the dollar, saying on a number of occasions that the greenback is too strong. Sally Auld at JPMorgan said last month that the dollar’s strength would wane in the middle of this year, predicting that reserve currencies including the euro and yen would outperform the dollar.
Decision to Reinvest Membership Fees
Costco said during its fiscal 2017 Q2 earnings call that it would jack up membership fees effective June 1. Costco plans to reinvest its membership fee income to keep customers happy, according to Short. For instance, the wholesale club said it would lift the reward cap for the executive membership from $750 a year to $1,000 a year. Half of the 35 million members that the latest fee hike affects belong in the executive membership category.
Short also noted that Costco is working on improving its Visa card economics.
Seasonally Higher Gas Price
Gas price tracking website GasBuddy.com, at the beginning of the year, estimated that the price of gas would increase to the highest level since 2014 this year. Costco said during its fiscal second quarter call that gas inflation was partly responsible for the increase in average transaction size in the U.S. during the quarter. Short sees further gas inflation as a catalyst for comps growth.
Costco’s comparable store sales increased by 3% in its fiscal second quarter.