Business
Despite fears of a margin crisis, Costco is handing over earnings
Costco (COST) reported a solid financial third quarter Thursday after the clock. Total revenue increased 16% year-over-year to $ 52.596 billion, beating the consensus Street estimate of $ 51.55 billion. Earnings per share grew 10.5% to $ 3.04, in line with estimates, despite a one-time fee of 13 cents per share for incremental benefits granted under a new employee agreement. Over the entire 1[ads1]2-week period, comparable sales in the US increased by 16.6% and 10.7% on an adjusted basis, which excludes the effect of petrol prices and foreign exchange. In Canada, comparable sales increased by 15.2% and 12.8% on an adjusted basis, while for the rest of the international companies, companies increased by 5.7% and 9.1% on an adjusted basis. E-commerce comparable sales increased 7.4% and 7.9% on an adjusted basis. For the company as a whole, comparable sales increased by 14.9% and 10.8% on an adjusted basis, higher than estimates of 11.5% and 9.37%, respectively. The bottom line Fear built ahead of the Costco quarter that the retailer would suffer a margin crisis like Walmart (WMT) and Target (TGT). But that did not happen, and once again Costco showed why it is the best-run retailer on the planet and a winner of market share regardless of the macroeconomic environment. The stock may not be cheap by any means, but we believe the market is willing to give it a premium because of its reliable earnings growth. It’s a little surprising for us to see COST stocks trade a little lower in after-hours trading given that many feared a profit loss after seeing Walmart and Target quarters. But this is typical of COST on earning night. Believe it or not, for a stock that traded at a record high in April, the stock has traded lower on 13 of the last 18 earnings reports. The reason for this is that much of the good (or bad) news is priced in when the company reports its monthly sales. Chalk up tonight’s moves to historical trends, and we will continue to stick to this best retailer. Membership statistics Revenue from membership fees is a closely followed calculation because it is subscription-based and is where Costco earns most of its profits. Membership fees increased by about 9.2% year-over-year to $ 984 million, beating estimates at $ 968 million. Costco ended its quarter with a total of 116.6 million cardholders, an increase from 114.8 million total cardholders last quarter. Paid managers ended the quarter at 27.9 million, up from 27.1 million the previous quarter. The renewal rate in the US and Canada was 92.3%. This is up 0.3 per cent from the previous quarter. The worldwide renewal rate reached 90% for the first time in the company’s history, up 0.4% from the previous quarter. Costco continues to see higher renewal rates for first-year members than historical levels. People love being a Costco member. Margins Gross margins were lower by 99 basis points from last year, but excluding the effect of gas inflation, they would have been lower by 53 basis points. Corporate margins were squeezed during the quarter by core commodities, where margins fell by 87 basis points on a reported basis and 46 basis points excluding gas inflation. The sales mix was the primary driver of the downturn because higher gas prices put pressure on gross margins. In core goods, gross margins fell mainly due to free food, which is a very difficult comparison from last year when maturity was low and productivity was high. Associated and other companies’ margins increased by 6 basis points on a reported basis and 18 basis points excluding gas inflation. Elsewhere, “2% reward” reported margins increased by 8 basis points and 3 basis points without gas. LIFO margins (last in, first out) fell 25 basis points on a reported basis and 27 basis points excluding gas. Other margins fell 1 basis point both ways. Other items The best categories in the third quarter of the financial year were sweets, miscellaneous, tires, toys, jewelery, kiosks, home furnishings, clothing, bakery and delicatessens. Liquor, office, sports equipment and hardware performed worse. The global popularity of Costco means that the company still has plenty of room for expansion. The management now expects to open a total of 24 new department stores this year. That is four fewer than what they said in the previous quarter, but a pressure on timing is always to be expected. Costco now expects to open the four delayed department stores by the end of the November calendar. Costco’s warehouse in Shanghai’s Minhang district was closed for the past six weeks in the third quarter, negatively impacting sales by $ 35 million. Costco’s second building in Suzhou largely avoided closures and restrictions. A third Shanghai building is expected to open in December, and four more buildings are expected in China over the next few years. The company estimated price growth in the quarter at 7%. It is up from about 6% in the previous quarter and 4.5% to 5% two quarters ago. On the positive side, inflation in fresh food was slightly lower than in the previous quarter a year ago. The company said it has not seen much trade down from the consumer. Trade down is when consumers start buying more private label goods over branded products as a way to keep costs in check. The company attributed the large volumes they make in a relatively low number of warehouse units (SKUs) as a reason why it has done an effective job of curbing price increases. Potential catalysts At the conference call, management immediately raised membership prices. Remember that Costco has historically increased its membership fee every five to six years, and we are approaching the five-year anniversary of the last hike in June. Although many, including us, hoped to see management announce a price increase because the extra dollars usually fall straight to the bottom line, they said they did not think it was the right time. Their rationale was the current macro environment and how high inflation has placed a burden on consumers. With Costco’s renewal rates as strong as they are, Costco can probably increase the membership fee with little or no resistance from customers. There was zero talk of cash on the balance sheet and the potential for a special dividend, but we continue to believe that an announcement is possible later this year. Costco has paid a special dividend four times in the last eight years, the last being in November 2020. (Jim Cramer’s Charitable Trust is long COST and WMT. See here for a complete list of shares.) As a subscriber to CNBC Investing Club with Jim Cramer , you will receive an exchange notice before Jim makes a trade. 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A shopper loads a car with bottled water at a Costco wholesaler in Chingford, UK March 15, 2020.
John Sibley | Reuters
Costco (COST) reported a solid financial third quarter Thursday after the clock. Total revenue increased 16% year-over-year to $ 52.596 billion, beating the consensus Street estimate of $ 51.55 billion. Earnings per share grew 10.5% to $ 3.04, in line with estimates, despite a one-time fee of 13 cents per share for incremental benefits granted under a new employee agreement.
