Warehouse club giant Costco Wholesale has cleared its intentions to give a brave fight against inflationary pressures and logistic challenges yet staying aggressive on holding prices for the members.
After posting the fourth quarterly earnings on September 23, that beat the market expectations, Company’s Chief Financial Officer Richard Galanti confidently said, “We’ve shown that with strong sales, we can certainly improve the bottom line as well.” He added that despite all cost issues, the company continued to work to mitigate cost increases in a variety of different ways and hold down and/or mitigate price increases passed onto the members.
The management’s comments come in the backdrop of mounting concerns about rising input costs, transportation charges and food costs threatening the margins.
Our Five Fast Takeaways
1. Quick numbers:
In the operating results for the 16 weeks ended August 29th, 2021, Costco reported net income of USD 1.67 billion (USD 3.76 per share) – 20% up from USD 1.389 billion (USD 3.13 per share) in the comparable quarter last year. Net sales grew 17.5% to USD 61.44 billion, up from USD 52.28 billion for the same quarter last year. Average transaction or basket was up 5.8% worldwide and 5.6% in the US. Membership fee income stood at USD 1.234 billion – up USD 128 million or 11.7% year-on-year. Gross margin slipped by 0.32% and excluding gas deflation, it was higher by 0.05% for the quarter. But for Costco, ancillary businesses have recovered fast from the pandemic blues, which improved margins and helped recover the dent caused in the core merchandise categories. A 20% jump in sales surprised many, who anticipated the pandemic-induced cost pressures spoiling the party for Costco. The retailer had witnessed heavy rush during the pandemic days as people ate more at home triggering bulk buying for domestic consumption.
2. Loyalty pays off:
Costco looks at the gross profit as a combination of a gross margin plus a membership fee. What fuels the company’s membership earnings is its strategy to ensure loyalty and certainty rather than one-off transactions. Costco’s loyalty and renewal rates keep going up. Also, the executive members who have a higher renewal rate, shop more frequently and buy more stuff. A rough estimate suggests that for every 100 people signing up as a member, a little over half sign up as an executive member, thereby ensuring loyalty and certainty of business. The company can now play its cards with aggressive pricing by managing costs and inflation.
3. Inflation management:
“Sales and member growth should help mitigate inflation pressures,” said Galanti, Costco’s CFO. The general inflationary trend, as it is poking a hole in the consumers’ pocket, is also crushing the company’s bottom line. Amidst continuing cost pressures, Costco had provisioned a USD 30 million LIFO (Last in-First Out- the costs of the most recent products purchased/produced are the first to be expensed) charge during the quarter. This is the first such charge since 2014. The company, however, looks to keep prices as low as possible by careful management at different supply-chain points such as merchants, traffic department, operators etc. If the inflation persists at a higher level and stays uncertain, it will be offset by a price increase.
4. Art with science:
In retail, the key lies in being price competitive. Costco has realised it and ingrained it in its corporate DNA. As Mr Galanti puts it, “It’s an art form more than a science” to strike a balance between rising inflation and achieving strong sales. Although the company is considered one of top with data analytics globally, it still prefers to do price elasticity evaluation as merchants do. Look at the competitive price, and buy better to improve margins and keep prices low. However, Costco is moving ahead towards adoption of high-tech tools such as data analytics for purchase projections and costs.
5. For investors:
A big positive indication coming from Costco management is that the company is opening more units in 2021 than it did in 2020. Costco looks to open at least 25 new units up from 20 last year, including second warehouses in each of China and France. It is also making a foray into New Zealand unlocking further business potential. Costco shares have increased over 20% so far this year and over 31% in the past 12 months. Company’s strategy to tackle inflation and cost pressures to keep prices stable, accompanied with the robust outlook for the membership fees and renewals gives confidence to the investors for a further upside in the stock.
The latest quarterly numbers indicate a continuing tailwind for Costco as festive spend will coincide with the ongoing ramped-up spending by the home users. Besides the home merchandise, food, the discretionary spend has surged on the items such as home furnishings, home appliances, electronics, sports, among others.