When you drive past Costco, you'll see that the parking lot is packed with cars. The left-turn lane leading to the store is lined with a long queue, stretching all the way over 50 yards. The gas station is also crowded with people, and after filling up their tanks, they prepare to go inside for shopping. This is the busiest intersection in town.
Poor stock price performance is not just a problem for Costco. Walmart – another retailer that consumers often turn to when looking to spend less – although it continues to attract more customers, has also shown an astonishingly similar recent stock price trend.
Why is that? Shouldn't they be the stable winners during periods of consumption contraction?
From a certain ironic perspective, the reputation of Costco and Walmart as defensive assets may actually be holding them back. As concerns about consumer prospects in the market intensify, investors are assigning a premium to their stocks. This, in turn, reduces their margin for error and makes them more sensitive to any further signs of weak consumption.
As shown in the figure below, since May 19th when both stocks closed at their historical highs, their performance has been much worse compared to the broader market and the consumer goods sector as a whole.
On the second day, President Trump stated that the Iran war negotiations had entered the "final stage," which caused oil prices to plummet and also weakened the aura of defense trading for Costco and Walmart. Subsequently, on May 21st, Walmart reported second-quarter profits that fell short of analysts' expectations, triggering a sell-off across the sector. Since then, neither stock has been able to recover those losses.
Is it good enough now?
When Costco released its quarterly financial report last month, it brought several positive aspects for investors. Both total sales and same-store sales increased compared to the same period of the previous year. The company also stated that it plans to open another 33 warehouses in the next fiscal year.
However, after the financial report, the stock price only rose by 3%. Compared to the decline that needed to be made up for, this increase is merely a drop in the bucket.
However, there are also some minor flaws. The profit of Costco exceeded expectations, partly due to a one-time tariff refund, while the growth in membership fee revenue has slowed down. When a stock is already priced quite high, investors tend to pay attention to every detail, including any footnotes.
Defensive, but not invulnerable
The ultimate contradiction faced by Costco and Walmart is that the more their stocks are regarded as defensive assets and pushed higher in price, the more investors focus on their growth potential; however, when they release their financial results, the market's expectations for them also become greater.
After all, the story of Costco and Walmart in the stock market is not about empty parking lots and empty shelves. On the contrary, the more people flock to these stores in search of discounts, the higher the barriers the market sets for them. They may be great places to shop, but that does not automatically mean their stocks are worth buying.
