Costco Margin Shortfall Clouds Otherwise Great Quarterly Results
Costco reported a total revenue rise of 16% to $52.60 billion in their 2022 third quarter reporting which took place after Thursday’s market close. Comparable stores sales up 16.6% including gasoline, or 10.6% without the benefit of fuel. This puts them on track for their first $200 billon year ever.
But neither these nor other stellar reporting numbers could offset the effect of a 99-basis point year-over-year drop in profits to 10.19% missing Street estimates of 11.5%. This drove Friday morning’s opening stock price down, only to recover by noon. A far more forgiving market than last week’s that saw both discount brethren Target and Walmart get walloped.
Adjusted earnings of $3.17 per share beat the Zacks Consensus Estimate of $3.00. That number included a one-time $77 million pretax charge (or 13 cents a share) for incremental benefits awarded under the new employee agreement effective Mar 14. Quarterly earnings came in at $3.04 per share, beating the year prior reported earnings of $2.75 per share.
Through nine months of its fiscal year, Costco has driven sales of $151.97 billion, with analysts projecting annual revenue of $223.38 billion. Costco finished last year just short of the $200 billion mark, producing revenue of $195.93 billion.
Like every other retailer reporting Costco has been struggling with higher costs due to supply chain disruptions, exacerbated by fresh COVID-19 lockdowns in China and the Russia-Ukraine war. Costco said it was increasing prices in certain areas of food to combat inflation.
Categories that were both winners and losers more-or-less mirrored other major discounters. The best performing categories in Q3 were candy, tires, toys, jewelry, apparel, bakery, and deli, which were offset by weakness in liquor, office, sporting goods, and hardware, all of which were quite strong a year ago due to a surge in home-office and home-gym building. The favorable jewelry sales points to the fact that Costco’s core demographic has a higher average income than either Walmart or Target.
No Membership Increase Yet
While it has been widely reported that a bump in membership cost was expected later this summer, Costco’s Investor Relations SVP Rob Nelson stated “Given the current macro environment, the historically high inflation and the burden this is having on our members and all consumers in general, we think increasing our membership fee today ahead of our typical timing is not the right time,” Nelson said, “But we will let you know, however, when that changes.” I believe change is coming.