Costco shares dip despite earnings beat. There’s no cause for investor concern
Costco Wholesale ‘s third-quarter earnings topped Wall Street expectations on Thursday, driven by higher sales and lower-than-expected operating expenses. Even with a recent C-Suite transition, Costco delivered a business-as-usual quarter, as members flocked to its warehouses in search of quality merchandise at value prices. Total revenue in its fiscal 2024 third quarter increased 9.1% year over year to $58.52 billion, beating analysts’ expectations of $58.07 billion, according to estimates compiled by LSEG. Earnings per share in the three months ended May 12 totaled $3.78, beating analysts’ forecasts of $3.70, LSEG data showed. On an annual basis, Costco’s EPS grew 29%. After closing at a record $815.34 per share Thursday, Costco’s stock declined about 1.5% in extended trading. We’re pinning the slight pullback to the stock’s historical trading pattern of profit-taking immediately following earnings. The stock had rallied 23.5% year to date through Thursday’s regular session. Costco Wholesale Why we own it: Costco is the best-run retailer in the world, with a business model focused on offering its members a relatively small universe of products at hard-to-beat prices. Costco has succeeded for decades, but the high inflation of recent years has made the company’s value-focused ethos really shine. A potential bump in membership fees is one catalyst still on the horizon for the stock. Competitors: BJ’s Wholesale , Walmart and fellow Club holding Amazon Last buy: June 15, 2020 Initiation date: Jan. 27, 2020 Bottom line Costco delivered a quality quarter with not much to pick at. 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. In addition, it was great to hear from both new CEO Ron Vachris and CFO Gary Millerchip on what they deem areas of opportunities, such as investing in technology; online orders for in-store pickup; and monetizing retail media, a term used to describe retailers’ advertising businesses. Vachris took over the top job in January. Millerchip became finance chief in mid-March. Sure, Costco didn’t announce a membership fee hike Thursday, and the stock may get dinged on that. That’s proven to be a far more elusive catalyst than the special cash dividend that hit a couple of quarters ago . But Costco is running at such a high level with competitive prices that it doesn’t need raise fees just yet. And perhaps there was some speculation that Costco would announce a stock split because that’s come back in fashion on Wall Street, but the quietness here is not thesis-changing. Instead, we continue to see Costco has a company that will grow earnings and reinvest those profits back in the business to capture more market share and grow its footprint around the world. As a result, we are increasing our price target to $875 a share from $800, but keeping our 2 rating, meaning we continue to view pullbacks as the buying opportunity. Quarterly commentary Costco’s fiscal 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’re highlighting both reported and ex-gas figures because the ex-gas number offers a better window at the underlying fundamentals. The price of oil is not really something management can control. Core merchandise was flat on a reported basis, but a two-basis-point improvement when excluding the impact of gasoline. Costco saw a small margin headwind from sales of fresh food — part of a deliberate strategy to provide value — and a small positive contribution from non-foods. Meanwhile, margins were flat in its food and sundries category, which includes frozen foods and so-called dry grocery items 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 basis and a five-basis-point headwind ex-gas. Costco’s 2% reward program was a one-basis-point headwind to margins on both a reported basis and when excluding gas, a result of more sales to Costco’s executive members. Last in, first out (LIFO) inventory accounting was a two-basis-point benefit on both sides. This was due to a $11 million LIFO credit in the quarter, compared with no charge in the year-ago period. Costco’s reporting segment for so-called “other” items saw a 57-basis-point benefit on a reported basis and a 56-basis-point benefit ex-gas. This was due to last year’s results including a non-recurring charge to merchandise costs of $298 million, primarily due to the discontinuation of Costco’s charter shipping activities. COST .SPX 5Y mountain Costco’s five-year stock performance compared with the S & P 500. Costco’s inflation update remained encouraging. The company cited similar trends from the previous quarter, with inflation across all core merchandise essentially flat and fresh foods near zero. Meanwhile, slight inflation in food and sundries is being offset by some deflation in non-foods, in particular 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 finally increase its membership fee. To the disappointment of investors, it sounds like we will have to keep waiting. On Thursday’s call, finance chief Millerchip echoed the comments of his predecessor Richard Galanti, saying the company is waiting for the “right time” to raise its membership fees. Costco historically has done so every 5.5 years, which based on that timeline puts the company about two years overdue. Membership fees are a focal point because raising them would provide two distinct benefits. Some of those extra dollars will flow directly to the bottom line, meaning higher profits. But most of that money will likely be reinvested in the business to keep prices down, which in turn will drive higher sales volumes and improve Costco’s cost leadership among retail rivals . Always remember that Costco is a volume company, not a margin company. When Costco eventually decides to increase its membership fee, we expect it will find little resistance from its members. Its renewal rate in the U.S. and Canada ticked up again to 93% while worldwide stayed constant at 90.5%. Costco’s warehouse expansion for this year is continuing according to plan. The company estimates a net 28 new locations this fiscal year. Longer term, Millerchip said he thinks somewhere between 25 to 30 new warehouses per year is a “reasonable proxy.” (Jim Cramer’s Charitable Trust is long COST and AMZN. 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. 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Costco Wholesale‘s third-quarter earnings topped Wall Street expectations on Thursday, driven by higher sales and lower-than-expected operating expenses. Even with a recent C-Suite transition, Costco delivered a business-as-usual quarter, as members flocked to its warehouses in search of quality merchandise at value prices.
