Jefferies upgrades Costco to buy, saying its 'moat' in club retail is widening

Published Fri, Oct 16 20208:23 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

(This story is for CNBC Pro subscribers only). E-commerce won't be the only retail category that emerges from the pandemic as a winner of shifting consumer trends, according to Jefferies. The investment firm upgraded Costco to buy from hold on Friday and raised its price target on the stock by more than 35%, saying the club retailer was in a strong position despite an "underdeveloped" online presence. "As traditional grocery, dept store, and specialty retail share is displaced, we see club as a natural winner from trip consolidation. While e-com will grow faster and specialty grocery chains are growing, among broadlines peers, the club channel offers a compelling combination of expanding selection and better value," the Jefferies note said. The investment firm said that Costco was the "dominant player" in club retail and that its "leadership moat" was growing. Costco has seen strong growth so far this year, with same store sales jumping 14% year over year for its August quarter, according to FactSet. Those gains won't disappear once the health crisis is over, Jefferies argued. "We assume YTD20 share gains will be fully retained and we see further dislocation from store closures & traffic fallout across dept & specialty stores. Club continues to draw share in foods from conventional grocers," the note said. Jefferies set a price target of $435 per share for Costco, up from $321 and about 15% above where shares closed on Thursday. The stock has already surged 28% this year. Another reason that Jefferies is bullish on Costco is the demographic trends of millenials and Gen Z starting families. Attracting those groups could help the company expand margins, the firm said. "Millennials and GenZ households are shopping across a wider array of categories at COST. This is evidenced in sales mix trends, with non-food categories growing faster than foods at COST," the note said. As a result, Jefferies increased the multiple it used to value the stock, leading to a higher target price and upgrade.

Shoppers wearing face masks leave a Costco wholesale store in Washington, D.C.

Ting Shen | Xinhua News Agency | Getty Images

(This story is for CNBC Pro subscribers only).

E-commerce won't be the only retail category that emerges from the pandemic as a winner of shifting consumer trends, according to Jefferies.

The investment firm upgraded Costco to buy from hold on Friday and raised its price target on the stock by more than 35%, saying the club retailer was in a strong position despite an "underdeveloped" online presence.