Costco's Digital Sales Jumped 21% and Gas Volumes Hit a Record. So Why Did COST Stock Drop 5%?

Costco Wholesale (NASDAQ: COST) investors may be scratching their heads a bit over recent stock price movements following seemingly strong sales and earnings reports.

On June 3, the big-box retailer posted a huge May sales increase, up 14% from last May to $24 billion. Net sales for the first 39 weeks of the fiscal year are up 10% from the same period last year. Comparable store sales rose 12.5% in May and have jumped 8% through the first 39 weeks.

That was boosted by strength in two areas, including digital or online sales, which rose an impressive 21% year over year in May and 21% through the first 39 weeks.

Image source: Getty Images.

The other major spike came from gas sales. Comp sales excluding gas was 8%, so gas sales increases accounted for a third of the comp sales increase.

This followed a robust third-quarter earnings report released on May 29 for the period ended May 10, when comp sales rose 10%, digital sales spiked 21%, and gas sales set a record. Also, earnings shot up 15% to $4.94 per share.

So why has Costco stock been dropping?

Costco stock sputters

Typically, reports this strong would be a catalyst for the stock price to rise, but Costco shares have sputtered over the past week. The May sales report (released June 3) temporarily caused a spike as shares jumped from $962 per share to $997 per share when the market opened on June 5. But then shares tumbled back down to close at around $960, down almost 5%.

A big part of that June 5 drop was not related to Costco. There was an overall sell-off that day after a hotter-than-expected jobs report threw cold water on the prospects of a rate cut.

But Costco stock fell more than the broader market as investors are wary of its high valuation and may be taking profits, sensing drawn-out impacts from the Iran war and perhaps no rate-cut relief. Also, despite the blowout results, the overall gross margin dropped 21 basis points as Costco lowered prices on some key items and faced higher costs in areas (like transportation). It led to concerns that too much of the gains came from the temporary spike in gas prices.

These are all seemingly minor concerns, but when the stock is trading at 49 times earnings and 43 times forward earnings, there is not much room for error. Investors likely saw potential headwinds and decided to take some profits until the valuation drops.

Costco is a great long-term hold, but it's probably a bit overvalued right now to warrant calling it a strong buy.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.