Analyst Note| Zain Akbari, CFA |
Our $332 per share valuation of wide-moat Costco should not change much after it announced second-quarter earnings. Its sales growth outpaced our target (12.9% adjusted comparable expansion across the company versus our 12.0% mark), but we expected cost leverage on the heightened revenue that did not materialize (25 basis points of operating margin degradation, to 3.0%, rather than our forecast for 25 basis points of improvement). As the double-digit sales growth is attributable to the pandemic and the margin shortfall to freight and fuel pressures we see as transitory, we continue to expect mid-single-digit percentage sales growth and 3%-4% operating margins over the next 10 years. We suggest investors await a greater margin of safety, as Costco faces an uncertain normalization of spending habits once the pandemic ebbs (later this year, we assume).