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Barclays upgrades Costco to ‘overweight'

Yahoo Finance’s Emily McCormick joins Kristin Myers to discuss Barclays's new upgrade on Costco.

Video Transcript

KRISTIN MYERS: Well, let's talk now about Costco. As I mentioned earlier in the show, they were given an upgrade to overweight from Barclays. So for more on this, we're joined now by Yahoo Finance's Emily McCormick. Hey, Emily.

EMILY MCCORMICK: Hello, Kristin. And we did see another Wall Street firm now getting bullish on Costco, this time coming from Barclays and analyst Karen Short. She upgraded shares of the company to overweight from equal weight rate and raised her price target on the stock to $400 from $330 previously. That would imply upside of about 11.6% from yesterday's closing levels,

Now, a few assumptions here served as catalysts for this upgrade. One is Barclays expectation that traffic levels will remain robust and continue to improve going forward. Now, remember that we saw Costco in its fiscal fourth quarter growing comparable same-store sales by a better-than-expected 14% for that period ending in August. Now, the company did note at the time that traffic in-person at stores was down overall, but actually up in US stores specifically during that timeframe, so potentially something to see continue to improve in the quarters ahead.

Now, Barclays also speculated that increases in membership fees could be on the horizon in the intermediate term. That's something that could also help with Costco's top line, since we did see membership fee growth come in a bit slower than expected in that fourth quarter. It was up a bit over 5% over last year.

Now, also on a separate subject, I want to highlight that Barclays said that there is a high likelihood that Costco may pay out a special dividend in the near term given its current cash balances. Those cash and cash equivalents have been at $12.3 billion at the end of the August quarter. And note that Costco has paid out special dividends in the past.

These tend to be quite a bit higher than its regular dividends. For context, we just had that last declared dividend this past summer at $0.70 per share. The last special dividend had been $7 per share back in 2017. So quite a bit higher there.

Now lastly, the final thing I want to point out is a key point that Barclays made around what it considers to be Costco's, quote, special sauce, and that's what they said is the company's merchandising excellence driven in turn by Costco's special curation, its private label, and the treasure-hunting experience and it's really curated for its customers. In a key quote here, they said, quote, "it may often be overlooked that Costco's best-in-class presence all starts with merchandise, the discipline of having 3,800 stock-keeping units, and its ability to leverage relationships with vendors and suppliers. This leads to a best-in-class velocity in SKUs, unmatched across all of retail globally." Now, on the heels of this note, we do have Costco shares up about 1% intraday and adding to a year-to-date gain of about 20%. Kristin?

KRISTIN MYERS: All right, thanks so much, Emily McCormick.