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Costco delivers a strong quarter, and we see two catalysts ahead
Costco Wholesale (COST) delivered solid fiscal 2023 fourth-quarter results after the closing bell Tuesday, beating expectations on both the top and bottom lines and improving gross margins year over year. While many chains are struggling due to too much inventory, theft, and a weakening consumer, once again Costco showed off the power of its club membership model and provided additional proof that it’s the best-managed retailer in the United States. Total revenue for the reported quarter increased 9% year over year to $78.94 billion, beating analysts’ expectations of $77.9 billion, according to estimates compiled by LSEG, formerly known as Refinitiv. Earnings per share (EPS) grew 16% year over year to $4.86, beating analysts’ forecasts of $4.79. Shares of Costco dropped 2% in after-hours trading. Following Tuesday’s close at $552.96, Costco shares have gained more than 20% year to date, outperforming peers such as Walmart (WMT), Target (TGT), Home Depot (HD) and Lowe’s (LOW). However, on Wednesday, Costco shares reversed and rose 2%. COST YTD mountain Costco YTD Bottom line It was another good quarter down from Costco, as its leadership on price continues to drive people to its stores. From a broader perspective, there’s a concern in the market right now about what will happen to retail if the consumer weakens from here. But, Costco is in a great position to outperform its peers because it’s in the company’s culture to drive value for its customers. Meanwhile, Costco has virtually been unaffected by the inventory and theft troubles facing the industry, a sign of operational excellence. For example, organized shoplifting and violence have been such problems at Target that the retailer said on Tuesday it’s closing nine stores in major U.S. cities. Shares of Target hit a 52-week low in Wednesday’s trading. We remain steadfast in our view that Costco is the name to own for the long term in a tough retail group due to the momentum it’s seeing in its club model based on traffic and renewal rates. Also, we’ll nudge our price target up to $600 per share from $575 on the increasing likelihood of a membership fee increase and special dividend sometime in the next 12 months. However, we are keeping our 2 rating on the stock as we prefer to see more of a pullback from these near-all-time high levels before adding to our COST position. Quarterly commentary As a reminder, Costco releases its sales figures on a monthly basis, making it well-understood where sales land when it comes time to report quarterly results. What is harder to pin down — and this is mostly true for all retailers as they battle sticky inflation and bloated inventories — is how margins fared. Costco’s reported gross margins, excluding membership fees (which flow directly into profits), expanded 42 basis points from last year to 10.6%. On the post-earnings conference call with analysts and investors, Costco management broke down all the levers of the quarterly margin performance. Core merchandise was a 51-basis-point improvement on a reported basis and 28-basis-point improvement excluding the decline in the price of gasoline from the year-ago period. Costco saw a positive margin benefit from food, sundries and even nonfoods, though free foods was down slightly. On the big-ticket side, Costco noted that appliance sales were up 30% in the quarter and remarked that 1-ounce gold bars are selling fast online. Costco’s ancillary businesses — including gas stations, pharmacies, food courts, travel centers and hearing aid centers — provided a 32-basis-point headwind on a reported basis, and 38 basis points drag excluding gas deflation. These declines were almost entirely driven by increased gasoline sales. Costco’s 2% reward program was a 4-basis-point headwind to margin on a reported basis and 2 basis points excluding gas deflation, due to more sales coming from Costco’s executive members. Last in, first out (LIFO) inventory accounting was a 27-basis-point benefit because the company recorded a charge that was $193 million less than last year. In more encouraging news, Costco continues to see a downward trend in inflation. After managing through 8% year-over-year inflation at its highs last summer, Costco said it has seen inflation trend down from 3% to 4% in the fiscal third quarter to an estimated 1% to 2% in its fourth quarter. CFO Richard Galanti pointed out that its fresh food business is flat while other categories like food and sundries (which includes consumer packaged goods) are still a little bit up, and big ticket items are down partly because of lower freight. With the rate of cost growth slowing, Costco has the luxury of keeping prices down in order to take more market share. This is often seen in the company’s traffic metrics, which increased 5% worldwide and 5% in the United States, and also through its renewal rates, which ticked up in the U.S. and Canada. So, as Costco gained members and with renewals as strong as they are, naturally the first question on the earnings call centered on when management would raise its membership fees. This is a question management has been asked on every call for the past couple of years because it’s something the company has traditionally down every five to six years, and we’ve blown past the previous record between fee hikes. Costco raised its fees in June 2017. The reason why we frequently talk about a membership fee increase in our Costco discussions is that extra income from membership can flow directly to Costco’s bottom line, meaning higher profits. Or management can use those extra dollars to reinvest in the business and keep prices down, thereby increasing traffic and sales. When asked about this, Galanti gave little indication that a fee hike was imminent but reminded everyone that it’s a question of “when, not if … so stay tuned, we’ll keep you posted.” On the potential for Costco to pay out a special dividend, which they’ve done four times in the past, Galanti reaffirmed that it’s “part of our DNA” but acknowledged it’s “a little harder to do” because that cash is earning so much in interest with rates around 5%. Lastly, on the topic of shrink , which includes shoplifting, internal theft and damaged goods, is a hot-button item in retail, Galanti said Costco’s inventory shrink has not increased “dramatically” compared to historical results. In fact, he said shrink has only increased by a couple of basis points, which the company attributes to the rollout of self-checkout. Costco does not issue forward guidance. (Jim Cramer’s Charitable Trust is long COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
People enter and exit a Costco Wholesale store in Bayonne, New Jersey, on March 26, 2023.
Gary Hershorn | Corbis News | Getty Images
Costco Wholesale (COST) delivered solid fiscal 2023 fourth-quarter results after the closing bell Tuesday, beating expectations on both the top and bottom lines and improving gross margins year over year. While many chains are struggling due to too much inventory, theft, and a weakening consumer, once again Costco showed off the power of its club membership model and provided additional proof that it’s the best-managed retailer in the United States.
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