Jim Cramer: 'Costco's in a funk' but still a good name in a bad neighborhood

Costco said June total sales rose 10.6% YoY to $29.4B, slightly below expectations, while U.S. comps excluding gasoline slowed to +7.6% (from +8.7% in May). Shares fell more than 4% on Thursday as traffic growth eased to +3.2% and average ticket growth (ex-gas, FX, inflation) moderated to +3.7% from +4.0%, though e-commerce rose 21.5% and ancillary businesses (gasoline/pharmacy) were a bright spot. The stock trades at 41x forward earnings versus Walmart’s 36.5x and the S&P 500’s ~20.5x, leaving limited room for disappointment ahead of July sales on Aug. 5.

Analysis

This is not a thesis-breaker for COST; it is an expectations reset. At 41x forward earnings, the stock is priced for near-perfect comp stability, so even a mild deceleration can compress the multiple faster than it changes near-term EPS. The first-order risk is valuation air-pocket, not a deterioration in the operating franchise.

Second-order, the cleaner relative beneficiary is WMT, which should keep absorbing trade-down demand if consumer stress persists. But if the softening is broad rather than a one-off, the whole retail complex can de-rate together: basket inflation eases, tickets slow, and even defensive retail loses multiple support. That argues for watching mix quality, not just headline comps, because traffic holding while ticket slows is the classic early warning that demand is normalizing lower.

Contrarian view: the market may be overreacting to one monthly data point that still reflects a high-quality business. The real falsifier is not a modest slowdown; it is a sequential step-down in July sales plus weaker membership trends on the next quarterly update. Over 1-3 months the better trade is relative valuation compression; over 6-18 months, renewed comp acceleration would justify the premium and squeeze shorts.

Key Decisions for Investors

• Pair trade: long WMT / short COST for 6-8 weeks into the Aug. 5 sales release and Sept. 24 earnings; target multiple convergence if COST stays sub-8% U.S. comp growth and membership data does not reaccelerate.
• If holding COST outright, trim on rebounds or hedge with a Sep COST $900/$850 put spread; this expresses valuation compression risk without betting on a business break.
• Underweight XRT on any retail bounce if consumer survey data and card-spend trends keep rolling over; the setup favors broad retail de-rating more than stock-specific failure.
• Set a watch item on COST membership and July sales: if paid-member growth or renewal rate ticks down again, treat that as the primary falsifier for the long-term premium multiple.