Legg Mason upgraded shares of wholesale retailer

Costco

(COST) - Get Report

Tuesday, saying that improved gross margins and cost controls aren't reflected in the stock's current price.

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Analyst David Schick raised his rating on the company to buy from hold, set a $37 price target and increased his earnings estimates. For 2004, he now expects $1.68 a share, from $1.65 a share, and assumes 5% same-store sales, 7.9% footage growth and 10% membership fee income growth.

"We believe Costco may be increasingly willing to work more on 'within their control' costs as 'outside of control' costs have intensified," Schick said. Additionally, he feels the company might realize that some categories, such as wine or high-end specialty products, could offset gross margin pressures sooner than expected.

Also, the next two quarters' same-store sales comparisons should ease. The company faces 3.8% comparisons now, as opposed to the 6.3% average monthly year-over-year comparisons. "Easier comparisons should give the business model some breathing room," Schick said.

In the longer term, "Costco is among the retail top-line giants, and is not losing share," the analyst said.

Shares of the company were gaining 2.6% in afternoon trading to $30.21.