Costco Wholesale Corporation (COST), the largest warehouse club operator in the U.S., reported its fiscal fourth-quarter results on Tuesday, September 26, 2023, after the market close. The company beat analysts’ expectations on both earnings and revenue, but its stock price remained flat in after-hours trading.
Costco’s Earnings Highlights
- Costco reported adjusted earnings per share of $4.86, higher than Wall Street expectations of $4.78 and up 12% from the same quarter last year.
- Revenue for the quarter came in at $78.94 billion, higher than the consensus estimate of $77.72 billion and up 15% year-over-year.
- Same-store sales, including gas and foreign exchange, increased by 1.1%, slightly lower than the expected 1.87%. Excluding gas and FX, same-store sales grew by 3.1%, also below the forecast of 3.29%.
- Membership fees, which account for about 70% of Costco’s operating income, rose by 9% to $1.3 billion, driven by a 5.5% increase in renewal rates and a 4.5% increase in paid members.
- Gross margin improved by 20 basis points to 11.6%, as the company benefited from lower merchandise costs, higher gas margins, and favorable sales mix.
- Operating income increased by 13% to $2.1 billion, while net income rose by 12% to $1.8 billion.
- For the full fiscal year 2023, Costco’s EPS increased by 16% to $13.14, while revenue grew by 16% to $222.7 billion.
Costco’s Growth Drivers and Challenges
Costco’s strong quarterly results reflect its resilient business model, which relies on offering low prices, high-quality products, and a loyal membership base. The company has been able to maintain its competitive edge in the retail industry, despite facing challenges such as supply chain disruptions, labor shortages, inflation, and rising competition from online rivals.
Some of the key growth drivers for Costco include:
- Expansion of its store network: Costco opened 13 new warehouses in the fourth quarter, bringing its total to 890 worldwide. The company plans to open 25 more locations in fiscal 2024, including its first store in New Zealand.
- Growth of its e-commerce business: Costco’s online sales increased by 9% in the fourth quarter, compared to a 91% surge in the same period last year when the pandemic boosted online shopping. The company has been investing in its e-commerce capabilities, such as improving its website, mobile app, delivery options, and online assortment.
- Increase of its membership fees: Costco has historically raised its membership fees every five to six years, and the last increase was in 2017. Analysts expect the company to announce another fee hike in the near future, which could boost its revenue and profitability.
- Diversification of its product offerings: Costco has been expanding its product categories, such as fresh foods, organic products, health and beauty items, and private-label goods. The company also offers various services to its members, such as travel, optical, pharmacy, and auto.
- Attraction of new and younger customers: Costco has been attracting new customers, especially younger and more affluent ones, who value its convenience, quality, and value proposition. The company has also been leveraging its social media presence, celebrity partnerships, and marketing campaigns to reach new audiences.
However, Costco also faces some headwinds that could limit its growth potential, such as:
- Rising costs and inflation: Costco has been facing higher costs for labor, transportation, commodities, and merchandise, which have squeezed its margins and profitability. The company has been passing some of these costs to its customers, but it also has to balance its pricing strategy with its low-cost image and customer loyalty.
- Intense competition and changing consumer preferences: Costco competes with other warehouse clubs, such as Sam’s Club and BJ’s Wholesale Club, as well as other retailers, such as Walmart, Target, Amazon, and Kroger. The company also has to adapt to the changing preferences and behaviors of consumers, who are increasingly shopping online, seeking convenience, personalization, and sustainability.
- Regulatory and legal risks: Costco operates in a highly regulated and litigious environment, which exposes it to various risks, such as antitrust, labor, environmental, privacy, and tax issues. The company also faces potential lawsuits and fines from customers, suppliers, employees, and authorities.
Costco’s Stock Performance and Outlook
Costco’s stock price closed at $552.96 on Tuesday, down 1.01% from the previous day. The stock has gained 15.61% year-to-date, outperforming the S&P 500 index, which has risen 11.34% in the same period. The stock has a market capitalization of $246.4 billion and a price-to-earnings ratio of 42.1, which is higher than the industry average of 28.9.
Analysts have a mixed view on Costco’s stock, with an average price target of $537.67, implying a 2.76% downside from the current level. The consensus among 32 analysts is to hold the stock, with 13 recommending a buy, 16 recommending a hold, and 3 recommending a sell.
Costco’s outlook for the next quarter and fiscal year is positive, as the company expects to benefit from its strong fundamentals, loyal customer base, and growth initiatives. The company also anticipates a favorable holiday season, as consumers are likely to spend more on gifts, travel, and entertainment. However, the company also faces some uncertainties and challenges, such as the ongoing pandemic, supply chain disruptions, inflation, and competition, which could affect its performance and stock price.
