Costco Wholesale’s third-quarter earnings beat Wall Street expectations on Thursday, thanks to higher sales and lower-than-expected operating expenses. Even with a recent transition to C-Suite, Costco had a business-as-usual quarter as members flocked to its warehouses in search of quality merchandise at great prices. Total revenue in the third quarter of fiscal 2024 increased 9.1% year-over-year to $58.52 billion, beating analysts’ expectations of $58.07 billion, according to compiled estimates by LSEG. Earnings per share for the quarter ended May 12 were $3.78, beating analysts’ forecasts of $3.70, according to LSEG data. On a year-over-year basis, Costco’s EPS increased 29%. After closing at a record high of $815.34 per share on Thursday, Costco’s stock fell about 1.5% in extended trading. We attribute this slight decline to the stock’s historical pattern of profit-taking, immediately after earnings. The stock had risen 23.5% year to date through Thursday’s regular session. Costco Wholesale Why we own it: Costco is the world’s best-run retailer, with a business model focused on offering its members a relatively small universe of products at hard-to-beat prices. Costco has been successful for decades, but high inflation in recent years has really made the company’s value-driven philosophy shine. A potential increase in member dues is a catalyst still on the horizon for the stock. Competitors: BJ’s Wholesale, Walmart and another Club that owns Amazon Last Purchase: June 15, 2020 Launch Date: January 27, 2020 In summary, Costco delivered a quality quarter with few choices. The company continues to post impressive comparable sales growth for a company of its size – a sign of market share gains in a volatile retail environment. Additionally, it was great to hear new CEO Ron Vachris and CFO Gary Millerchip talk about what they see as areas of opportunity, such as investing in technology; online orders for in-store pickup; and retail media monetization, a term used to describe retailers’ advertising activities. Vachris took over as CEO of the group in January. Millerchip became CFO in mid-March. Of course, Costco didn’t announce a membership fee increase Thursday, and the stock could be affected. This has proven to be a much more elusive catalyst than the special cash dividend paid a few quarters ago. But Costco is operating at such a high level with competitive prices that it doesn’t need to raise its fees yet. And maybe there was speculation that Costco would announce a stock split because that has come back into fashion on Wall Street, but the quiet here doesn’t change the thesis. Instead, we continue to see Costco have a business that will grow its profits and reinvest those profits back into the business to capture more market share and increase its presence around the world. As a result, we are increasing our price target from $800 to $875 per share, while maintaining our rating of 2, meaning we continue to view pullbacks as a buying opportunity. Quarterly Commentary Costco’s third-quarter gross margins of 10.84% slightly missed Wall Street estimates, but still increased 52 basis points on a reported basis and 54 basis points excluding gas inflation. We highlight both published and ex-gas figures, as ex-gas figures provide a better window into the underlying fundamentals. The price of oil isn’t really something management can control. Core commodities were flat on a reported basis, but improved by two basis points when excluding the impact of gasoline. Costco saw a slight unfavorable margin from fresh food sales – part of a deliberate strategy to create value – and a small positive contribution from non-food products. Meanwhile, margins remained stable in the food and miscellaneous category, which includes frozen foods and so-called dry grocery products like pasta. Costco’s ancillary and other businesses – including gas stations, pharmacies, food courts, travel and hearing aid centers – represented a six basis point headwind to margin on a reported and reported basis. a headwind of five basis points excluding gas. Costco’s 2% rewards program represented a one basis point drag on margins, both on a reported basis and excluding gasoline, due to increased sales to Costco executive members. Last-in, first-out (LIFO) inventory accounting represented a two basis point advantage on both sides. This was due to an $11 million LIFO credit in the quarter, compared to no charge in the prior-year period. Costco’s reporting segment for so-called “other” items recorded a profit of 57 basis points on a reported basis and a profit of 56 basis points excluding gas. This was driven by last year’s results, including a $298 million one-time charge on merchandise costs, primarily due to the discontinuation of Costco’s charter shipping business. COST .SPX 5Y mountain Costco’s five-year stock performance relative to the S&P 500. Costco’s inflation update remained encouraging. The company cited similar trends from the previous quarter, with inflation for all core commodities essentially flat and fresh produce near zero. At the same time, slight inflation in food and miscellaneous goods is offset by some deflation in non-food products, particularly hardware, sporting goods and furniture. It has long been assumed on Wall Street that once Costco saw its merchandise inflation stabilize at zero, it would eventually increase its contributions. Much to the disappointment of investors, it appears we will have to wait some more. On Thursday’s call, CFO Millerchip echoed his predecessor Richard Galanti’s comments, saying the company was waiting for the “right time” to increase its contributions. Costco has historically done this every 5.5 years, which based on this schedule puts the company about two years behind schedule. Membership dues are a focal point because increasing them would provide two distinct benefits. Some of those extra dollars will go straight to the bottom line, which means higher profits. But most of that money will likely be reinvested in the business to keep prices low, leading to higher sales volumes and improving Costco’s cost leadership among its retail competitors. Always remember that Costco is a volume business, not a margin business. When Costco ultimately decides to raise its dues, we expect it to encounter little resistance from its members. Its renewal rate in the United States and Canada increased again to 93%, while worldwide it remained constant at 90.5%. Costco’s warehouse expansion for this year is continuing as planned. The company estimates it opened 28 net new locations this fiscal year. Longer term, Millerchip said it believed between 25 and 30 new warehouses per year was a “reasonable approximation.” (Jim Cramer’s Charitable Trust is long COST and AMZN. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade . Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. 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Customers using the Costco self-checkout area, Queens, New York.
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Costco wholesaleThird-quarter earnings beat Wall Street expectations on Thursday, thanks to higher sales and lower-than-expected operating expenses. Even with a recent transition to C-Suite, Costco had a business-as-usual quarter as members flocked to its warehouses in search of quality merchandise at great prices.