You drive by Costco and see the parking lot teeming with cars. The left-hand turn lane to enter is backed up 50 yards. The gas station is packed with people planning to head inside after they fill up. It’s the busiest intersection in town.
But then you pull up a stock chart. Shares are down 16% since a peak in May. You’re confused. Didn’t you just read that earnings were strong this past quarter?
The stock underperformance isn’t just a Costco issue. Walmart — another retailer that shoppers have historically traded down to when trying to spend less — has an eerily similar recent stock chart despite continuing to add customers.
What gives? Aren’t these supposed to be all-weather winners of a consumer pullback?
In an ironic way, the reputation of Costco and Walmart as defensive plays may have worked against them. As worries about the consumer grew, investors built a premium into their stocks. That, in turn, gave them less room for error, and made them more sensitive to further signs of weaker spending.
The chart below shows just how badly both stocks have underperformed the market — and the broader consumer staples sector — since they closed at record highs on May 19.
The following day was when President Trump said Iran-war negotiations were in the “final stages,” sending oil sharply lower and taking some of the shine off the defensive trade in Costco and Walmart. Then, on May 21, Walmart forecast second-quarter profit below analyst expectations, triggering a sector-wide sell-off. Neither stock has been able to claw those losses back.
Good isn’t good enough anymore
Costco gave investors plenty to like in its quarterly report last month. Both overall and comparable sales were up from a year earlier, and the company said it plans to open 33 additional warehouses over the next fiscal year.
But the resulting 3% post-earnings gain was a drop in the bucket compared to how much ground the stock has to make up.
There were some minor caveats. Costco’s profit beat was partially driven by a one-time tariff refund, while membership-fee growth slowed. When so much has been priced into a stock, investors tend to notice every asterisk.
Defensive, but not invincible
Walmart’s path has been even more directly tied to consumer anxiety. Its latest results from late August beat expectations, and the company raised full-year guidance. But US comparable-sales growth also slowed to its weakest pace in six years. And that, of course, is what investors focused on.
Earnings reports have become a minefield for Walmart, with shares falling 9% and 7% after its past two reports, respectively. The reason is familiar: Even though the company is gaining market share and adding customers, they still aren’t growing fast enough for investors.
The ultimate tension with Costco and Walmart is that the more their stocks get priced up as defensive plays, the more investors care about their growth — and the higher the stakes get when they report.
Ultimately, the story of Costco and Walmart in the stock market isn’t a tale of empty parking lots and aisles. It’s quite the opposite. The more people flock there for deals, the higher the bar gets. They may be great places to shop, but that doesn’t automatically make their stocks a buy.
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