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Costco Shares Dip After Late Thanksgiving Holiday Holds Down Q1 Sales

Costco's mixed first quarter earnings highlighted by weakening online sales, marking a stark contrast to big retail rivals who are growing digital offerings in order to drive profit growth.

Costco Wholesale Corp.  (COST) - Get Costco Wholesale Corporation Report shares edged lower in pre-market trading Friday after the bulk discount retailer said a late Thanksgiving holiday held down first quarter sales.

Costco said diluted earnings for the three months ending on November 24 -- just prior to the 2019 holiday -- came in at $1.90 per share, up 9.8% from the same period last year and just ahead of the Street consensus forecast. Group revenues, however, missed analysts' estimates, despite rising 5.6% to $34.24 billion, as the quarter period came to a close prior to Thanksgiving Thursday.

Online sales were a major factor in the broader revenue miss, with digital sales rising on 5.7% from last year, compared to gains of 22% and 26.2% over the previous two quarters. Costco also faced a 16-hour Thanksgiving weekend website failure that likely hit millions in potential sales.

"It was unfortunate, despite all the efforts to have plenty of capacity -- processing capacity, if you will, there was something that incurred," CFO Richard Galanti explained to investors on a conference call late Thursday. "When we look at the five days between Thanksgiving and Monday -- Cyber Monday those five days on a year-over-year basis. I mean we still were up in the very high teens as a percentage on e-commerce. So consistent what we've showed you -- what we have currently been running what tells us we could have done better than that." 

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"So we did leave something on the table there," he added. "And again, we were able to correct it, it took several hours that day unfortunately, but rest assured, we're spending a lot of money on things like that."

Costco shares were marked 0.82% lower in pre-market trading Friday to indicate an opening bell price of $294.90 each, a move that still leaves the stock with a year-to-date gain of 44.8%, firmly ahead of larger rival Walmart's  (WMT) - Get Walmart Inc. Report 28.6% advance but well behind the 93% surge for Target Corp.  (TGT) - Get Target Corporation Report.

Costco also said comparable sales for the quarter rose 5%, topping the Refinitiv forecast of 4.95%, but membership renewal rates in both the U.S. and Canada (90.9%) and in markets around the world (88.4%) continued to trend near record highs.

"Despite a rare minor execution issue recently, we continue to believe that Costco will continue to widen its digital relationship with its members and expanding its capabilities, supporting an outlook for Costco to maintain its premium valuation," said BMO Capital Markets analyst Kelly Bania, who reiterated her outperform rating on the stock and its $320 price target.