The Ratings Game: Plunge after Amazon–Whole Foods deal is Costco shares’ worst stretch since Great Recession

Shares of Coscto Wholesale Corp. continued their retreat Friday, extending the most damaging stretch of losses since the Great Recession, fueled by news of Amazon.com Inc.’s deal to buy Whole Foods Market Inc.

Analyst Mark Astrachan at Stifel Nicolaus, who hosted a recent meeting with Costco executives, including Chief Financial Officer Richard Galanti, said the membership-based warehouse retailer’s executives were “surprised at both the deal and the negative share-price reaction,” as they believed other grocers would be more exposed than Costco to competition stemming from the deal.

Costco’s stock

COST, -1.66%

slumped 1.7% on Friday to its lowest closing level since Dec. 7. It has now tumbled 12.7% since the Amazon–Whole Foods deal was announced, the worst six-day percentage performance since the stock tumbled 13.4% during the six-day stretch ending Nov. 19, 2008.


FactSet, MarketWatch

In comparison, shares of grocer Kroger Co.

KR, +0.18%

are down 8% since the deal was announced. That figure may be a bit misleading, however, given that the shares had plunged 19% the day before the deal after Kroger posted disappointing results.

Sprouts Farmers Markets Inc.’s stock

SFM, +2.13%

has slipped just 1.8% since the deal, but it, too, had shed 9.4% the day before the deal, in sympathy with Kroger’s selloff.

Don’t miss: Grocery stocks tank as ‘Amazon effect’ strikes fear in investors .

See also: Amazon ‘will be a top 5 grocer in the U.S.’ with Whole Foods acquisition.

Astrachan kept his buy recommendation on Costco but slashed his stock-price target to $173, which was 10.1% above current levels, from $191.

“From a stock standpoint, while Amazon/Whole Foods will not impact near-term results, it is likely to impact industry trends longer-term, which uncertainty regarding strategic plans for the combined entity and the response from legacy participants, limiting multiple expansion, and share price upside, from current levels,” Astrachan wrote in a note to clients.

He said that while Costco’s executives didn’t intend to make major changes in strategy in the wake of the Amazon–Whole Foods deal, they anticipated “accelerating measures to enhance the consumer value proposition.”

Perfect timing, because a BMO Capital study, published just before the Amazon–Whole Foods deal was announced, showed that prices on Costco’s website were 17% lower than those on Amazon.com, giving Costco a “big opportunity” online.

Don’t miss: Costco’s online prices are lower than Amazon’s, study finds.

So while Astrachan acknowledged that the uncertainty surrounding the effects of the Amazon–Whole Foods merger will weigh on the grocery sector, Costco, in his view, is likely to outperform its peer group, given its “competitive advantage, including an increased focus on e-commerce and fresh food strategies.”


FactSet, MarketWatch

Costco did not immediately respond to a request for comment.

Costco’s stock has lost 1.9% in 2017, while the SPDR Consumer Discretionary Select Sector exchange-traded fund

XLY, -0.12%

has advanced 10% and the S&P 500 index

SPX, +0.16%

has gained 8.9%. In comparison, Amazon’s stock

AMZN, +0.24%

has shot up 34% so far this year and Whole Foods shares

WFM, -0.59%

have surged 40%.

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