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Yemen's Houthi rebel attack on Saudi Arabia oil may hit Costco and BJ's profits

Brian Sozzi
Editor-at-Large

The impact of the Houthi rebel drone attacks on key Saudi Arabian oil production assets could blowback on the profits of beloved U.S. retailers Costco (COST) and BJ’s Wholesale (BJ).

On Monday, oil prices spiked roughly 14% following the weekend’s surprise siege in Saudi Arabia. In turn, many oil experts are concerned about a risk premium being priced back into the oil markets for an extended period.

“There has really been no geopolitical risk premium in oil prices for a while now, and clearly we now have a significant geopolitical event,” explained Tortoise managing director of energy Rob Thummel on Yahoo Finance’s The First Trade.

By extension, a prolonged period of higher oil prices thanks to rising geopolitical fears could funnel its way down to more expensive pump prices at U.S. gas stations. That is likely bad news for investors hoping for big quarters out of major gas sellers Costco and BJ’s Wholesale.

While each retail chain normally sees sales pop because of higher gas prices (increased average selling price per gallon), the warehouses tend to price their gas below nearby stations to entice shoppers. What that means is that despite the prospect for higher overall same-store sales due to richer gas prices, the chains will usually earn next to nothing on the profit margin line.

Think zero desire by each retailer to exert pricing power during a period where one would think they would lift prices to compensate for increased costs.

Gross margins take a hit

“Outsized growth in gas (driven by price increases or market share gains) can contribute meaningfully to comparable store sales, but typically weighs on gross margins given that gas is a low-margin category,” points out Goldman Sachs analyst Christopher Prykull.

Prykull provides some helpful historical perspective.

Motorists refuel at the Costco gas station in Burbank, Calif., Friday, Oct. 5, 2012. Californians woke up to a shock Friday as overnight gasoline prices jumped by as much as 20 cents a gallon in some areas, ending a week of soaring costs that saw some stations close and others charge record prices. (AP Photo/Damian Dovarganes)

“As a historical example, 2Q18 represents a recent period of higher gas (U.S. regular retail gas was up ~20% during the quarter). During this timeframe, gas sales benefited both BJ’s and Costco comparable store sales by 3 points. Costco’s gross margins declined ~30 basis points (core margins excluding gas were close to flat); BJ’s gross margins increased ~20 basis points (core margins excluding gas were up ~80 basis points),” Prykull writes.

Goldman Sachs estimates that 10% to 15% of sales for Costco and BJ’s Wholesale are leveraged to gas stations. Costco and BJ’s Wholesale operate more than 567 and 138 gas stations, respectively.

Prykull does acknowledge there is a wildcard here: the investor reaction.

Go-to destinations for gas

Although the warehouses may not post blowout quarters during periods of higher gas prices, investors have shown in the past a propensity to rotate into the names as some form of safe-haven trade. The logic is that the warehouses become the go-to destination for shoppers to save money when gas prices are chipping away at their disposable income.

“Given the attractive gas prices at warehouse clubs (used to help drive traffic), it is possible that higher prices could even lead to gas market share gains for BJ’s/Costco (higher prices leading to consumers being even more price-conscious). In late June 2018, the price of WTI oil increased 17% in a little over one week, shares of Costco were up ~4% over the next 30 days (BJ’s was not yet public),” notes Prykull.

In the aforementioned second quarter of 2018 when gas prices popped, Costco and BJ’s saw their stock prices rise 14.5% and 22.1%, respectively, according to Yahoo Finance data. The S&P 500 only rose 8.3% during that same stretch.

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

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