Cost Pressures Weigh on Costco’s Margins, but Long-term Story Remains Intact; Shares Trade Fairly

We do not plan to alter our $476 per share valuation of wide-moat Costco significantly after it posted first-quarter sales that conformed with our expectations, but more margin pressure than we anticipated. A time value of money-related adjustment should offset the valuation impact of the profitability shortfall. The cost pressure reflects transitory factors rather than a change in the company’s long-term positioning, and so we still assume mid- to high-single-digit annual percentage revenue growth and operating margins approaching 4% over the next decade. We have a favorable view of Costco’s competitive standing and its growth prospects, but with the shares trading near our valuation, we suggest investors seek a margin of safety.