Price is too high

COST is priced way beyond where the two major comps, Target (TGT) and Walmart (WMT) are priced in terms of earnings. Admittedly the model and consumer base are strong, but in my view a 10x earnings premium is not justified.

COST PE Ratio TTM data by YCharts

Joins may be slowing

We need to use unique metrics because of the club sales program COST uses. Getting people to join the program is the key for Costco's sales. And while COST has done a great job of getting new members in to the program of late, based on Google Trends info, it looks like they may have just pulled future members into the program early. You can see that this year the number of people looking into joining peaked much earlier than normal.

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Terrible margins

COST manages to compete with TGT and WMT by earning a lower margin on sales. This is due to a lot of factors including footprint and merchandise mix, but the fact remains: COST needs to sell twice as much as its competitors to make as much money.

COST Gross Profit Margin Quarterly data by YCharts

While this is great for trying to take market share, there is no evidence that COST will ever be able to match its competitors in terms of profitability.

No one is searching for stores

Finally, in terms of taking market share, COST doesn't seem to be capturing a lot of potential new customers. I looked at searches for all three retailers' locations, and COST has fallen way behind its competitors

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Getting new customers in is obviously important for revenue, and though COST does a great job retaining fans, management can't be happy with the marketing performance here

Risk and reward

Obviously there's a possibility that COST outperforms expectations this quarter. They have earned a lot of good press recently due to their stance on minimum wage and, to a lesser extent, their one-time dividend, so sales may be better than I expect.

But with the low margins the company runs, COST needs to sell a lot of toilet paper to move the needle. And there's not much room for multiples to grow, so there's more downside than upside. I see the stock hovering around where it is before profit-taking pushes the price down into the 90s.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.