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Wall Street drills Costco stock because it's paying workers $2 more an hour during COVID-19

Brian Sozzi
·4 min read

So much for doing the right thing.

Costco (COST) shares were drilled to the tune of 3% on Friday after delivering what looked to be an impressive fiscal fourth quarter. The company posted quarterly earnings some 33 cents ahead of analyst estimates, powered by an unworldly 11.4% same-store sales gain. Costco members flocked to warehouses to keep their cupboards stocked up as they continue to spend more time at home during the COVID-19 pandemic. Executives pointed out on an earnings call that it believes the pandemic has brought in new Costco members, too.

To round out the on-paper positives, Costco topped $4 billion in net earnings for the first time in its fiscal year and enters its new fiscal year armed with a $12.3 billion cash war chest.

Then why the selloff in Costco’s stock? Simply put, analysts appear not too pleased Costco continues to pay its workers what has become known in retail as pandemic pay. Costco began paying its workers an extra $2 an hour back in March at the height of the pandemic. While other retailers such as Kroger and Target have stopped pandemic pay, the notoriously pro worker Costco has kept its practice intact.

And it took a bite out of the bottom line in the fiscal fourth quarter.

Costco realized a whopping $281 million — or 47 cents a share pre-tax — in extra costs tied to the pandemic pay and extra sanitation costs. Execs previously outlined $100 million of these extra costs for the fourth fiscal quarter.

On the earnings call, Costco CFO Richard Galanti signaled no change to pandemic pay is in the offing for now. That likely spooked sell-side analysts that have pushed up their profit estimates on Costco amid strong pandemic related shopping sales gains.

“To-date we are doing that [paying $2 an hour extra] and we've committed to doing that at least through, I believe the first eight weeks of this fiscal quarter, and again, we'll take that time and again. Our numbers have been very good, our employees are on the frontline,” Galanti said.

Customers queue to shop at Costco in Thurrock, Essex, the day after Prime Minister Boris Johnson put the UK in lockdown to help curb the spread of the coronavirus. (Photo by Gareth Fuller/PA Images via Getty Images)
Customers queue to shop at Costco in Thurrock, Essex, the day after Prime Minister Boris Johnson put the UK in lockdown to help curb the spread of the coronavirus. (Photo by Gareth Fuller/PA Images via Getty Images)

Jefferies analyst Christopher Mandeville said in a note to clients pandemic pay could cost Costco about $112 million in the most recent quarter.

When asked by an analyst if it will be hard for Costco to essentially cut pay for workers at some point as the pandemic recedes into the background, Galanti said it could be done effectively.

“I don't think it’s completely hard to take away. We communicate via our COO and our Head of HR to our employees,” Galanti said, adding “I think it may be hard, but not impossible and we want to make sure we communicate to our employees of why we're doing it and we'll just have to wait and see.”

All in, Wall Street would be wise to look beyond the pandemic pay issue on Costco. Being generous with employee compensation has long been in the Costco DNA as a means to drive strong customer service and prevent workers from leaving for other gigs (which is a cost). Moreover, with strong sales momentum into the holidays and a looming board meeting where Costco could announce new shareholder friendly uses for all its cash — the stock does have positive catalysts on the horizon.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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