Why Costco Stock Was Heading Lower Today

Key Points

• Costco beat estimates on the top and bottom lines.

• The company said that demand for discretionary items was fading.

• The valuation remains at a P/E around 50.

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Shares of Costco (NASDAQ: COST) were pulling back today after the warehouse retailer delivered solid fourth-quarter results, but they weren't quite strong enough to push the stock up, given its lofty valuation. And management's comments about weakening discretionary spending may have spooked some investors.

As of 10:16 a.m. ET on Friday, the stock was down 2.5%.

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Business as usual for Costco

Costco is one of the steadiest businesses in retail, and it showed that in its latest report. Same-store sales in the quarter rose 6.4%, adjusting for fuel prices and currency exchange, which lifted revenue to $86.2 billion, up 8% from a year ago and topping estimates at $86.1 billion.

The company continued its strong membership growth with global renewal rates at 90%, and membership fee income jumped 14% to $1.72 billion, benefiting from a fee hike in the quarter a year ago. On the bottom line, earnings per share rose 11% to $5.87, beating the consensus at $5.81.

On the earnings call, management did note that consumers were pulling back on discretionary spending, and it was adjusting its assortment accordingly. That may have helped cool off the stock.

While Costco makes most of its revenue from staples like groceries, it tends to earn a higher margin on discretionary items like electronics or furniture.

What's next for Costco

Management doesn't give guidance, but the company's results tend to be pretty stable from quarter to quarter. Still, even a business like Costco can be vulnerable to an economic downturn.

For now, the business continues to look rock-solid, but its price-to-earnings ratio around 50 will continue put pressure on the stock and create high expectations around its earnings reports.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.