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Four Reasons to Pass on Costco

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Consumers more likely to hit Wal-Mart, Target, and the deep discounters.

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It's pretty likely that some upper-crust retailers may see small pockets of strength in the months to come. But for the most part, frugal shoppers (like me -- I'm cheap) will be searching out low prices and clearance specials -- particularly during the holiday season -- and as such, will be more likely to schlep their way to the popular discount stores.

Washington-based wholesale club Costco (COST) has some things going for it as well as some things that aren't too swift. Here they are (in no particular order):

1. I do agree that some consumers are looking to save money and costly trips to the store (read: gas) by buying items in bulk. However, I also believe that the vast majority of consumers are looking for storefronts that carry wide-ranging merchandise selections that are known for their super low prices.

You may be wondering: Isn't that kind of what Costco does? The answer is sort of. It has many types of food, some clothing, some books, and other merchandise. But if you're interested in a certain variety of ketchup or need to replace one light bulb (that is, you don't need items sold by the truckload but still want them at rock-bottom prices), I'd wager you'll hit a store like Wal-Mart (WMT), or perhaps a Target (TGT) first. While not as plentiful as the proverbial Starbucks (SBUX) on every corner, both Wal-Mart and Target are convenient for most cost-conscious Americans.

2. Looking at the earnings picture, I'm not all that impressed either. The company has missed expectations the last two quarters, which doesn't make it stand out in a positive way. It also trades at a pretty oversized 22.8 times the current year's estimate, which is now $2.47. Contrast this with Wal-Mart, which can be taken in at a more appetizing 13.8 times the fiscal 2010 estimate.

3. Costco is due out with its fourth-quarter numbers on October 7 and analysts are looking for $0.76. I think the earnings result will probably be in the range of a penny north or south of that number. But even if it beat by a couple of cents, it would still be hard to get too excited. Besides the high price-to-expected earnings multiple, I don't think investors are really going to be cozying up to this story unless and until it turns in a couple quarters of above-consensus results.

4. I don't have any reason to latch onto this now, which is why I'm steering clear. I'd rather dip my big toe into other discounters, including the deep discounters ala Dollar Tree (DLTR) or Family Dollar (FDO). Speaking of latter, it's due out with its fourth-quarter numbers on the October 7, too. The Street is looking for $0.41, and I think it will hit that or beat by one or more cents.

Click here for my last take on Costco.

Hey, have a great day!

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No positions in stocks mentioned.

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