Costco Stock Slips as Same-Store Sales Trail Estimates

• Costco reported results that exceeded Wall Street's expectations for quarterly sales
• The retailer's strong sales were driven by consumers visiting its stores for affordable groceries and essential items
• Still, shares dipped after the company’s same-store sales came in just below analyst expectations

Costco Wholesale Corp (NASDAQ:COST) shares fell nearly 2% after the retailer reported weaker-than-expected same-store sales (SSS) for its fourth fiscal quarter.

While the company topped analyst expectations on top and bottom lines due to strong grocery sales, Costco is seeing weaker trends in discretionary items. As a result, the company’s comparable sales in the U.S. rose just 0.2%.

How Costco Performed in FQ4?

Costco reported earnings per share of $4.86 for the fourth quarter, which was enough to top the average analyst estimate of $4.78. Revenue rose 9.5% year-over-year to $78.94 billion, just above the expected $77.72 billion. The vast majority of the company’s revenue comes from net sales, which came in at $77.43 billion for the FQ4.

This is despite the same-store sales, including gas, rising 1.1% YoY, while analysts were expecting a growth rate of 1.9%. Excluding fuel, and reported in constant currency, same-store sales were up 3.8%, just below the expected rise of 3.9%.

“Overall, for the fiscal fourth quarter, food and sundries were relatively strong once again, with fresh foods right behind and with some offsets on some of the nonfood categories,” said Richard Galanti, Director, Executive Vice President, and Chief Financial Officer at Costco.

U.S. comparable sales rose just 0.2% while Canada sales jumped 1.8%, both below the expectations of 2.3% and 2.2%, respectively. Comparable international sales were up 5.5%, again below the expected 6.8%. Digital sales fell 0.8% YoY with the management saying that consumers are spending less on big-ticket and discretionary items, like electronics.

“Results showed good improvement this quarter versus our year-over-year results in Q2 and Q3. In the previous two fiscal quarters, big-ticket discretionary, majors, home furnishings, small electrics, jewelry, and hardware, were down 15% and 20% year over year, respectively, and down just 5% year over year in the fourth quarter, with those big-ticket departments making up over half of our e-commerce sales,” Galanti added.

Costco said that membership fees were $1.51 billion, rising 14% YoY and topping the average analyst estimate of $1.46 billion. Costco experienced an increase in worldwide traffic by 5.2% YoY, while in the U.S., traffic also saw a rise of 5% compared to the previous year.

The total average transaction amount dropped by nearly 4%, and in the U.S., it decreased by 4.5%. The company said it ended the quarter with 71 million paid household members, marking an 8% growth YoY, while the number of cardholders rose 7.6% YoY to 127.9 million. The rate of new store openings was just below 3%.

Out of 71 million members, 32.3 million opted for the executive membership plan, marking an increase of nearly 1 million relative to the prior quarter. The executive membership is a higher-tier plan, which costs $120 on an annual basis. As much as 73% of Costco’s global sales come via this plan.

Investors were looking for a hike in the membership fee to boost the top line, however, it hasn’t occurred yet. The last time Costco increased the fee was in 2017 and the company typically increases the membership fees every 6 years.

“It's a question of when, not if. You know, it's a little longer this time around since June of '17. So, we're six years into it. And -- but, you know, you'll see it happen at some point,” the CFO said while answering an analyst question on the call.

At the moment, Costco operates 861 warehouses, including 591 in the United States. The company said it plans to open 10 new stores in the next 3 months, after adding 23 new locations in its FY23 year.

Performing Well in High-Rates, High-Inflation Environment

Costco has a tendency not to offer management comments in the quarterly earnings reports. For this reason, analysts and investors are eagerly waiting for the earnings call update to hear about the latest trends.

Discussing the company's recent sales trends, Galanti mentioned that shoppers made more trips to the retailer's stores, even though they spent less on average. Sales of higher-priced items in the U.S., excluding food, were weaker, and falling gas prices also had a negative impact on revenue.

Costco has gained momentum in the past three years as membership-based warehouse clubs benefited from dynamics such as more Americans cooking from home and more millennials moving into suburban homes with bigger pantries during the pandemic.

Inflation has also driven some shoppers to sign up and renew their memberships to clubs, including Walmart-owned Sam’s Club and BJ’s Wholesale Club. Still, strong sales in certain departments are helping the company to perform reasonably well in the environment of sticky inflation.

One such department is the appliances, where sales rose as much as 30% YoY. Galanti mentioned that one-ounce gold bars are especially sought after.

“When we load them on the site, they’re typically gone within a few hours and we limit two per member,” Galanti added.

Costco has adopted various approaches to increase customer spending when shopping outside the grocery department. These strategies include adding lower-priced, impulse-driven snacks and diversifying merchandise.

Furthermore, the retailer has kept its product offerings fresh by stocking popular gaming systems and introducing Christmas items early, with trees, toys, and decor selling well, according to Galanti.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.