New Costco Price Target After Harsh Report Turns Heads

We are lifting our price target for the shares of Two-rated Costco Warehouse COST to $1,200 from $1,150 following the company’s May revenue report that showed without question the company continues to win consumer wallet share. We see that continuing amid renewed inflation pressures found in the May PMI data from ISM that will weigh on consumer disposable income at a time when they are seeing a more dubious job market.

Wednesday's big miss for ADP’s May Employment Change report, the year-over-year jump in layoffs found in today’s May Challenger Job Cuts Report, and news this morning that Proctor & Gamble PG will let 7,000 employees go are likely to see consumers double down in being more selective in their spending. That announcement from PG follows Microsoft’s MSFT mid-May announcement that it will cut 6,000 across all levels, making it the company’s largest layoff since 2023. In that environment, we see Costco continuing to benefit as well as Amazon AMZN, which should be announcing its Prime Day data before too long.

As we lift our COST target, we’ll also boost our pick-up point to $990 from $962 and raise our panic point to $925 from $900.

Costco’s May Sales Figures

For the month of May, Costco reported net sales of $20.97 billion, up 6.8% year over year with total comp sales up 4.3% for the month. On an adjusted basis, that excludes the impact of gas and foreign exchange, May comp sales rose 6.0%, up 5.5% in the U.S., 6.3% in Canada and 8.4% in Other International. Separately, Costco’s May e-commerce sales rose 12% compared to year-ago levels. Measured against guidance from the likes of Target TGT that call for low-single-digit sales declines, we have an idea where Costco is taking consumer wallet share.

Exiting May, Costco had 905 warehouse locations up and running, unchanged compared to the end of April, but up from the 879 it had at the end of May 2024. During the company’s recent earnings call, management shared plans to open another 10 warehouses in the current quarter, which should mean it exists the current fiscal year with about 915 locations this August. That continued expansion mixed with the benefits of the company’s 2024 membership fee price increase should continue to fuel Costco’s differentiated business model that’s responsible for a meaningful portion of its pre-tax income and EPS.

The May Challenger Job Cuts Report

Per Thursday morning’s Challenger Job Cuts report, U.S.-based employers announced 93,816 job cuts in May, down 12% from 105,441 cuts in April, but up 47% from 63,816 announced in the same month last year. But it was the comment behind those figures that stood out to us:

"Companies are spending less, slowing hiring, and sending layoff notices..."

Reason being, that it sounded very much like the comment we identified in Wednesday's Fed Beige Book:

"All Districts described lower labor demand, citing declining hours worked and overtime, hiring pauses, and staff reduction plans."

Stepping back, Challenger’s data shows that through May, employers have announced 696,309 job cuts, an increase of 80% from the 385,859 announced in the first five months of last year. That speaks to our thinking that consumers are likely clamping down on discretionary spending, looking to stretch their dollars where they can.

Concerns About May Employment Report Remain

On Wednesday, we shared our view that we’re likely to see Friday's May Employment Report disappoint market expectations. In the vein of bad news is good news for the market, that miss along with cajoling from President Trump, we could see the market move higher as it thinks the Fed could soften its stance on rate cuts.

That is leading us to repeat our comments from Wednesday:

"This is where things could get tricky for the market. So long as job creation figures remain positive, and even if they dip into modest job losses, we’re likely to see the Fed remain focused on returning inflation back to its 2% target. Remember, several quarters ago, Fed Chair Powell signaled there could be some pain to get inflation down to that target. While that didn’t materialize in 2024, tariffs and the lack of trade deals so far mean we are on a different footing this year.

"Should Friday’s May Employment Report disappoint, we could see the market move higher as the herd contemplates the Fed doing more. However, should next week’s CPI and PPI data confirm what we’re seeing in the ISM’s May PMI Price figures and those from S&P, we could see the market gyrate as it re-thinks the number of expected Fed rate cuts.

"This means we’ll continue to pick our spots, and if need be, move to lock in some gains where it makes sense."

Before we get to those weekly jobless claims and April Import/Export figures, at 7:30 a.m. ET, the Challenger Job Cuts report for May will be published and we suspect folks will be watching this closely following Wednesday's disappointing May ADP Employment Change Report, but also the latest Fed Beige Book published Wednesday afternoon. The comment that stood out to us in that Beige Book was:

"Some Districts reported layoffs in certain sectors, but these layoffs were not pervasive."

Then, on Thursday morning, Procter & Gamble shared plans to cut 7,000 jobs, or roughly 15% of its non-manufacturing workforce around the world, over the next two years. That follows word Microsoft will cut 6,000 across all levels, making it the company’s largest layoff since 2023. Both follow Intel’s INTC announcement that it will cut more than 20% of its staff in April.

The combination of higher prices in May per ISM’s data and renewed layoff headlines helps explain why Costco’s net sales for May rose 8.0% year over year with U.S. comps adjusted for gas and foreign exchange up 5.5%. To us, that’s another confirmation point for our Cash-Strapped Consumer and Core Holdings models.

Turning to the Fed’s other mandate, maximum employment, S&P’s May Service PMI showed an upturn in hiring in the Services sector while ISM’s pointed to a rebound in hiring in that part of the economy as well. Granted at 50.7, the ISM Employment figure for May does not scream robust hiring but it’s likely to support a figure better than the disappointing 37,000 found in ADP’s May Employment Change Report.

Triangulating those figures, it’s hard to see how Friday’s Employment Report doesn’t deliver a May jobs figure below the 130,000 market consensus, which was already down from April’s 177,000 figure.

This is where things could get tricky for the market.

So long as job creation figures remain positive, and even if they dip into modest job losses, we’re likely to see the Fed remain focused on returning inflation back to its 2% target. Remember, several quarters ago, Fed Chair Powell signaled there could be some pain to get inflation down to that target. While that didn’t materialize in 2024, tariffs and the lack of trade deals so far mean we are on a different footing this year.

Should Friday’s May Employment Report disappoint, we could see the market move higher as the herd contemplates the Fed “doing more.” However, should next week’s CPI and PPI data confirm what we’re seeing in the ISM’s May PMI Price figures above and those from S&P, we could see the market gyrate as it re-thinks the number of expected Fed rate cuts.

All the more reason to tread carefully should the market move higher on Thursday and another one for why we’ll continue to heed the signals we collect each week. The next batch we’ll share with you will be out Saturday morning, so be sure to look for that missive!

More Pro Portfolio

At the time of publication, TheStreet Pro Portfolio was long COST, MSFT and AMZN.