Costco Upgraded by Jefferies to Buy on Growth Prospects

Jefferies sees Costco benefiting from a shift to the club channel from traditional grocery, department stores and specialty.
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Costco Wholesale  (COST) - Get Report is positioned for growth, according to a Jefferies analyst who upgraded the bulk discount retailer to buy from hold. 

Shares of the Issaquah, Wash.-based retailer were up 1.5% to $382.14 Friday at last check.

Jefferies analyst Stephanie Wissink also assigned the stock a price target of $435, up from $321, after assuming coverage of the shares.

In a note to investors, Wissink said she sees prospects for Costco to deliver about historic mid-single-digit same store sales through a combination of several factors, including a channel shift from traditional grocery, department stores, and specialty to the club channel.

The analyst also cited higher growth among new millennial and Generation Z households with a strong skew toward club offerings. 

"We are constructive on club retail as an outsized growth channel," she said. "Costco is the dominant leader, and digital underdevelopment offers a level of inherent upside optionality."

Wissink said trip consolidation was a pattern prior to the coronavirus pandemic, but it has been amplified by the outbreak. 

"We believe Covid gains are durable and shift the growth pace higher longer," she said.

Club stores continue to draw in share from onventional grocers, Wissink said, and club members are loyal, with 80% being members for over two years and about 85% expected to renew their memberships.

Price is "by far and away" the most cited reason for being a club member, Wissink said with production selection and quality coming in second.

Last week, Costco posted much stronger-than-expected sales data for September.

E-commerce sales, Costco said, leaped 90.3% from last year as customers increasingly used online shopping, as well as curbside pickup, to buy home-based staples amid the coronavirus pandemic.