Costco Wholesale Corporation is a consumer discretionary wholesale company with a focus on Hypermarkets and Super Centers. The current year has not been promising for consumer discretionary companies amid high inflation and increasing interest rates to tame inflation.
Inflation continues to take a toll on consumer discretionary spending intentions in the United States as spending intentions of the consumer have decreased in 2H’2022. The Q1 2023 results of Costco reflects that spending decisions of consumers are more rationalized in the current economic scenario to mitigate the impact of inflation and high interest rate regime.
Here are the updates on Costco’s Q1 2023 performance:
- Sales reported at $53.4B in 1Q23, an increase of 8.1% YoY. Net income is also up 3% YoY at $1.36B.
- Membership fee income (MFI) was up 5.7% YoY and renewal rates were strong at 92.5%. Paid executive membership hits $30M and now accounts for 45% of US sales and just under 73% of worldwide sales. The management of the company mentioned about likely increase in MFI but still non-committal on when.
- Gross Margins at 10.6% of sales down 45 bps YoY and 21 bps (excluding gas) due to a $93M charge due to downsizing some charter shipping activities. Without this charge, excluding gas and FX, gross margins would have only been down about 3 bps.
- Gas price inflation positively impacted Costco’s comps by 2.5%. The company has been able to compete with other discounters as gas prices have fallen and management noted that the gas business has gotten more profitable in the past 3 years. About 50% of Costco’s traffic is driven by their gasoline business.
- Operating profit was $1,751M, well below consensus of $1,889M. Operating profit growth of 3.4% decelerated sequentially and was the lowest we have seen since a 0.3% decline in 4Q18
- The Company reported an EPS of $3.07, an increase of 3% YoY. The reported EPS missed the street expectation by $0.09 due to a pretax charge of $93 million or $0.15 per share related to downsizing of charter shipping activities
Questions and Answers
Executive VP, CFO & Director Richard Galanti pointed towards a softening environment, but there were some improvements when it comes to inflation and inventory that Costco can pass down, hinting about an increase in the membership fees.
The CFO reiterated Costco’s expansion plan as the Company added 7 net new warehouses including 4 in the United States, 1 each in Korea, New Zealand and Sweden. The Company plans to add a total of 17 new warehouses in the remaining three quarters of 2023.
An analyst was concerned about the comps as COST needs a mid-single digit comps growth and with the concerns of a recession where discretionary spending is expected to reduce. Will it result in lower overall earnings growth for COST?
The CFO responded that although the COST does sell big-ticket discretionary products including furniture, patio furniture and garden products, it is not necessary a holiday season purchase for customers. He added that a major portion of the current sales is non-discretionary such as fresh foods, groceries and COST expects it to remain strong even in difficult economic conditions. However, still if the sales decline in a few quarters due to current economic challenges COST is well prepared to reduce its non-discretionary spend to continue the momentum of earnings growth. COST can manage the costs till comps growth of 4% – 5% range is maintained