00:00 Speaker A
let’s also talk about Costco. That one you’re lukewarm on that one. Let’s say got a neutral rating there and it sounds like valuation is a concern for you.
00:17 David
Exactly. So, a couple things here. Great company, we don’t think it’s a great stock, just because of where this setup here, and you’ve got a consumer name trading at almost 50 times earnings. So that’s a big number. Walmart’s in the mid 30s, also a big number, but relatively better. And so Costco, incredible operator. Their their execution has been nothing short of stellar in our view. You’ve got these mid single digit consistent comp numbers each and every month. No one’s really putting that up across the consumer space, but our concerns here is they do have an ads business, very similar to Walmart, but we think management has a different intention here, where you won’t see all the upside flow through to the bottom line and in quintessential fashion, Costco puts that upside back into the member experience. So, lower prices, better rewards. Then that’s probably the the right thing to do to protect your sales base, but we think investors are expecting a little more on the flow through. And then just evaluation piece, if if you potentially have a business that’s set up with all these investments to have a higher leverage point. What I mean by that is you need mid-single digits or high single digit sales in order to get margins higher. If if you have that set up going into a potentially slowing macro environment, we we just think that’s difficult to underwrite 50 times earnings on.
03:20 Speaker A
And then final final ticker, I want your take on Target. Now, that one, you’re neutral as well. So why are you on the sidelines there, David? And what would you need to see before getting more constructive?
03:42 David
Yeah. This has been, Target has massive upside potential here, right? You’re talking about a stock in the mid 90s or so, margins have been pressured. They’ve had slowing comp sales. We we think that’s a function somewhat of what Walmart has been doing with delivery and convenience, and getting that customer who wants to order online. And then you you’ve also had inventory shrink. So they they have not fully fixed this. You still have a lot of product that’s locked up in stores and that that’s keeping a lid on the margin rate at this point. But what we’d like to see is, you know, discretionary is a big piece of this business, almost half of the product base, half of the sales base leans more discretionary for target. And and that’s where we haven’t seen the recovery just yet. Apparel, home decor, electronics. So if if you start to see a shift there, know that that’ll definitely help the target profit recovery story because we look at this today with all the tariffs flying around and about 50% of their product sourced overseas. We actually see some downside risk to near-term numbers for target.