Costco reports mixed quarter, but we see positive catalysts on the horizon

Published Thu, Dec 8 20227:03 PM EST

Costco Wholesale (COST) reported mixed fiscal first-quarter results after the closing bell Thursday, amid weaker consumer demand. But the Club continues to see the fundamentals of the business as solid and are encouraged by the bulk retailer's expected membership fee hike and special dividend. Total revenue , which includes revenues from membership fees, increased 8% year-over-year, to $54.44 billion, slightly below the consensus estimate by analysts of $54.64 billion, according to Refinitiv. E-commerce comparable sales fell 3.7% year-on-year, or 2% on an adjusted basis. For the total company, comparable sales increased 6.6% year-on-year, or 7.2% on an adjusted basis. Earnings-per-share grew 3% year-over-year, to $3.07 a share, missing analysts' forecasts of $3.11 a share. The results were weighed down in part by one-off items. And with about 25% to 30% of Costco's earnings generated outside the United States, the strong U.S. dollar was also a drag on earnings. Bottom line Costco's numbers were slightly below expectations, but the Club holding isn't being penalized at the moment, with shares down just 0.27% in afterhours trading Thursday evening. Still, the stock has weathered a challenging December so far, down nearly 11% on weaker-than-expected comparable monthly sales for November — news that likely prepared the market for today's earnings miss. More importantly, the long-term direction of the business remains strong with positive catalyst events on the horizon, including a likely membership-fee increase and special dividend. And we are encouraged by apparent record e-commerce sales for Black Friday and Cyber Monday, according to management. Those days were not included in Costco's fiscal first quarter, which ended on Nov. 20. Nonetheless, we locked in some gains at a higher price late last week, given short-term concerns that the slowdown in November sales could indicate a larger trend. Membership stats Revenue from membership fees is a closely followed metric from which Costco earns the majority of its profits. Revenue from membership fees increased 5.7% year-over-year, to $1 billion, slightly missing estimates of $1.01 billion. Foreign exchange had a $32 million negative impact. Costco ended its quarter with 66.9 million paying household members and 120.9 million cardholders. Both are up 7% year-over-year. Renewal rates in the U.S. and Canada were 92.5%, compared to 92.4% a quarter ago. The worldwide renewal rate was 90.4%, in line with the previous quarter. Margins Reported gross margins fell 45 basis points year-over-year, and 21 basis points excluding gas inflation. Core merchandise margins fell 52 basis points on a reported basis, and 31 basis points excluding gas inflation. The core-on-core gross margin was down 31 basis points, with food and sundries up slightly, offset by a decline in nonfood- and fresh food margins. Ancillary and other businesses' margins increased 23 basis points on a reported basis, and 30 basis points excluding gas inflation. Gas business centers and travel were up year-over-year, while e-commerce, food courts, and optical were lower. Elsewhere, "2% reward" reported margins were down 2 basis points on a reported basis, and fell 5 basis points excluding gas inflation, implying higher sales penetration coming from executive members. LIFO — last in, first out — margins increased 3 basis points on a reported basis, and 3 basis points excluding gas. Costco still had a very small LIFO charge this quarter of less than $1 million, but it was less than the $14 million charge recorded in the first quarter last year. Other margins — a catchall bucket — fell 17 basis points on a reported basis and 18 points excluding gas inflation. Other items Costco opened up 7 new net warehouses in the quarter and plans to open 24 net stores this fiscal year. Costco is seeing commodities prices mostly come down, including corn flour, sugar, butter and steel. Potential catalysts When asked about plans for a membership-fee increase, CFO Richard Galanti once again pointed out that the current timing is still not at the average of the past three increases. Costco historically increases its membership fee every 5-years-and-7-months, the next anniversary of which comes in January 2023. The company has the pricing power to increase fees if it wants to, and the timing is a when, not if, situation. Another when, not if, situation is Costco's next special dividend. The company has paid out a special dividend 4 times in the past 8 years, the last being in November 2020. With nearly $11 billion of cash and cash equivalents on the balance sheet, Costco has plenty of capacity to reward shareholders again. (Jim Cramer's Charitable Trust is long COST. See here for a full list of the stocks.) 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