Costco gets whacked in retail bloodbath. Here's why we're sticking with it

Published Wed, May 18 20223:29 PM EDTUpdated Wed, May 18 20228:38 PM EDT

Kevin Stankiewicz @in/kevinstankiewicz @kevin_stank

Shares of Club name Costco (COST) sank Wednesday as tough quarters reported back-to-back from Walmart (WMT) and Target (TGT) slammed retail stocks. In fact, we sold half of our position in struggling apparel retailer American Eagle Outfitters (AEO) earlier Wednesday, taking some risk off ahead of its earnings report next week. However, in Costco's case, we're planning to stick with the stock ahead of next week's quarterly release, and we wanted to offer Club members an explanation on our rationale. Bottom line "I'm willing to own Costco through the cycle," Jim Cramer said during Wednesday's "Morning Meeting," as the stock went on to drop about 13% later in the day. As painful as that seems, it's still way above its 52-week low of $375.50 last June — and not nearly as bad as Target's 27% plunge Wednesday and Walmart's two-day loss of more than 17%. "That means it's going to be bad" in Costco, Cramer warned. "So you say, 'Why do you own anything bad?' Because we're not a hedge fund. We can't keep trading and trading," Cramer explained, noting the Club has done a lot of shuffling lately in order to high-grade our portfolio and get more defensive. We're long-term focused investors, not speculative traders, and we regard Costco as possibly the nation's finest retailer. A year from now, we believe the problems that may be afflicting Costco today will have abated. To be clear, we're not recommending Club members buy it here, but we're also not running for the exits. "I expect Costco to go lower. They're not immune. At the same time, I'm not going to try to dodge this bullet" and try timing a bottom in the stock, Cramer added. "I just don't think that 's possible. I think that's too hard." Big picture We know investors are fleeing many stocks in the retail sector , as some corporate profits tighten and concerns crescendo about whether the highest inflation in decades is slowing down the economy. On the other hand, we also know some retailers are better suited to navigate the current moment than others. So far, profits have not been worse-than-expected across the board. Off-price retail chain, TJX Companies (TJX), for example, beat analysts' earnings expectations Wednesday morning, and its stock popped 9%. TJX was the only stock in the S & P 500 consumer discretionary sector in the green Wednesday. Shares of Home Depot (HD) and Lowe's (LOW) were in the red, but the home improvement retailers both reported better-than-expected EPS on Tuesday and Wednesday mornings, respectively. Home Depot's stock closed higher Tuesday. The results of Home Depot and Lowe's signal that spending on the home from both contractors and do-it-yourselfers held strong in the first three months of the year. Shoppers were willing to tolerate higher prices for these kinds of products . Examining Costco Costco sells a range of goods — food, clothes, electronics, etc. — but it is a different company than Target or a standard grocer or apparel retailer. It is a wholesaler that charges a membership fee in order to shop in its warehouse-like stores. That membership fee is a key part of Costco's profitability picture, and it is possible the company could decide to raise the price. Costco also has strong customer loyalty, built up over the years. "Costco has its own private label that is doing very well. Costco has an expansion plan that's great. But Costco is a club, and Target is not a club. The club membership is such that you know you're going to get the best price, and they're going to get the stream of revenue from the [membership fee]." We have to wait a little for Costco's next earnings report, due out after the bell a week from tomorrow. On March 3, the company reported results for the quarter ended Feb. 13, which came in above Wall Street's estimates on the top and bottom lines. Costco is unusual in its decision to report monthly sales data, so investors do have some more recent visibility into its business. Costco's April sales, for example, rose 13.9% year over year to $17.33 billion, the company said on May 4. Comparable sales, excluding fuel price changes and currency impacts, rose 8.7%. It's important to note Costco's monthly update do not include performance on profitability metrics like operating and net income, as well as earnings per share. Those are especially important in this inflationary environment. On April 13, Costco also announced an increase to its dividend. It boosted the quarterly payout to 90 cents, up from 70 cents. The new level equals $3.60 annually. (Jim Cramer's Charitable Trust is long COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Customers carry their items after shopping at Costco in Washington D.C., May 5, 2021.

Ting Shen | Xinhua News Agency | Getty Images