Costco loses Buy rating at Wells Fargo due to earnings risk
J. Michael Jones

Wells Fargo downgraded Costco Wholesale Corporation (NASDAQ:COST) to an Equal Weight rating (equivalent to Neutral) from Overweight (equivalent to Buy) on Monday, after pointing to growing headwinds.
While Costco (COST) is still considered a high-quality name by the firm, analyst Edward Kelly and team point to a number of hurdles in the path of this "rich multiple" stock moving forward.
High on the list, comparable sales growth for Costco (COST) is seen at risk of arriving lower than anticipated on food dis-inflation, the lapping of outsized traffic gains in gas, and a weakening consumer. Meanwhile, limited recent data has suggested that the retailer's traffic has moderated recently.
Kelly also warned that an eventual pullback in fuel margins and currency exposure could clip earnings momentum.
"We also are wary of how COST cycles the recent period of historic EBIT margin expansion given its typical stability and customer-first reputation. In the end, we see more risk to consensus estimates going forward than upside potential, not a good set-up for this name given its valuation."
Potential catalysts for Costco (COST) for 2023 include a membership fee increase and special dividend, but the timing on both is uncertain.
Wells Fargo lowered its price target on COST to $490 based on a 34X multiple of the 2023E EPS.
Shares of Costco (COST) fell 1.15% in premarket action to $480.86 vs. the 52-week trading range of $406.51 to $612.27.