Costco in Perspective

Costco (Nasdaq: COST) reinforced what we already knew when it gave a negative second-quarter forecast recently. Things are pretty bad out there, and no retailer's immune.

The warehouse discounter disclosed that second-quarter earnings will be "substantially below" analyst estimates. Chief Financial Officer Richard Galanti pointed to general economic conditions pinching sales and said sales of non-food merchandise have been challenging. So the difficult economic climate has also hurt merchandise margins.

None of this is really that surprising, since there were similar tidings in last quarter's results. One difference last quarter was that Costco was helped by gasoline profitability.

Meanwhile, it's no secret that consumers are really reining in their spending, because of fear or necessity. This bodes well in some ways for discounters, but at the same time, retail in general is struggling.

Costco's recent price drop presents a good opportunity. It's a company with a great business model and an impressive management team, and its mission to provide low-priced wares makes it one of the retailers that should be able to do well despite the economy. It's also got manageable debt levels and cash on the balance sheet. The current environment is not the end of the world for Costco.