Costco Stock Is Down 12.45%. Here's Why

It was a bad day for retail stocks, with back-to-back disappointing earnings results from two retail giants dragging down the rest of the sector, including popular warehouse club Costco (NASDAQ:COST). On Tuesday, Walmart reported lower than expected earnings, which caused its stock price to drop 11.4%, and a further 6.8% on Wednesday, to $122.42. Then on Wednesday, Target posted much lower than expected first-quarter earnings, which caused its stock price to plunge 24.93% to $161.61. Both retail giants cited higher fuel and labor or compensation costs as big reasons for missing earnings estimates, reports CNBC.

These two disappointing first-quarter earnings dragged down the rest of the retail sector, which is affected by many of the same concerns over inflation, supply chain issues, and softening consumer demand, explains The Motley Fool. Although inflation is slowing down, food prices are expected to continue climbing. Costco shares ended the day on Wednesday at $429.40, a drop of 12.45%, while trading volume spiked up to more than 9 million shares, compared to its average trading volume of 2.6 million shares. This is the biggest drop in Costco's share price in more than two years, reports Seeking Alpha, and comes after the stock reached a 52-week high of $612.27 on April 7.

A false rumor and valuation concerns were also factors

Some of the increased trading volume may have also been due to a fake rumor that Costco was planning to raise the price of its much-loved hot dog and soda combo by $1 to $2.50, due to inflationary concerns, reports Benzinga. That would have been big news indeed, since the hot dog combo has been the same cheap price since it was first introduced in the 1980s. There are also concerns that Costco's shares are overvalued. Even factoring in the latest share price drop, Costco is still trading at a price-to-earnings ratio of 34.6, which is nearly twice that of the S&P 500, making it one of the more expensive retail companies with brick-and-mortar stores (via The Motley Fool).

However, analysts also expect Costco to increase its membership fees over the summer, which could have a positive effect on its stock price, if prior membership fee increases are any indication, explains Yahoo! Finance. Costco is scheduled to report its quarterly earnings after hours on May 26, and analysts are expecting an increase in earnings per share to $3.05 from $2.75, according to The Motley Fool.