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Costco Wholesale (COST) reported mixed results for the fiscal first quarter after the closing bell on Thursday, amid weak consumer demand. But the club still sees the fundamentals of the business as solid and is encouraged by higher expected membership fees from the wholesale retailer and private profits. Total revenue, which includes revenue from membership fees, rose 8% year-over-year, to $54.44 billion, just short of analyst estimates of $54.64 billion, according to Refinitiv. Comparable e-commerce sales fell 3.7% year over year, or 2% on an adjusted basis. For the company total, comparable sales increased 6.6% year-over-year, or 7.2% on an adjusted basis. Earnings per share grew 3% year over year, to $3.07 per share, missing analyst expectations of $3.11 per share. Results were partially weighted by one-time items. And with roughly 25% to 30% of Costco’s profits generated outside the US, the strong US dollar has also been a drag on earnings. The bottom line is Costco’s numbers were slightly below expectations, but the club’s ownership has not been penalized for the time being, with shares down just 0.27% in after-hours trading Thursday night. Still, the stock has weathered a difficult December so far, down nearly 11% on the back of weaker-than-expected comparable monthly sales for November — news that likely set the market up for today’s earnings miss. More importantly, the long-term trend of the business remains strong with positive catalyst events looming, including a potential increase in membership fees and a special dividend. And according to management, we were encouraged by the apparent record e-commerce sales of Black Friday and Cyber Monday. Those days aren’t included in Costco’s first fiscal quarter, which ended Nov. 20. However, we had some gains at a premium late last week, on short-term concerns that a slowdown in November sales could point to a larger trend. Membership Statistics 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, just short of estimates of $1.01 billion. Foreign exchange had a negative impact of $32 million. Costco ended the quarter with 66.9 million paying family members and 120.9 million cardholders. Both are up 7% year over year. Renewal rates in the US and Canada were 92.5%, compared to 92.4% a quarter ago. The global renewal rate was 90.4%, in line with the prior quarter. Margins Gross margins were down 45 basis points year-over-year, and 21 basis points excluding gas inflation. Underlying merchandise margins were down 52 basis points on a reported basis, and 31 basis points excluding gas inflation. Underlying to core gross margin decreased by 31 basis points, with a slight increase in food and derivatives, offset by a decrease in non-food and fresh food margins. Comp and other margins were up 23 basis points on a reported basis, and 30 basis points excluding gas inflation. Gas and travel business centers were up year-over-year, while e-commerce, food courts, and optics were lower. Elsewhere, “2% bonus” margins were down 2 basis points on a reported basis, and were down 5 basis points excluding gas inflation, indicating an increased spread of sales from executive members. LIFO margins increased — last in, first out — 3 basis points on a reported basis, 3 basis points excluding gas. Costco still had a very small LIFO fee this quarter of less than $1 million, but it was less than the $14 million reported in the first quarter of last year. Other margins — which is a comprehensive range — were down 17 basis points on a reported basis and 18 basis points excluding gas inflation. Other items Costco opened 7 new network warehouses in the quarter and plans to open 24 net stores this fiscal year. Costco is seeing lower prices for mostly commodities, including cornmeal, sugar, butter, and steel. Possible Catalysts When asked about plans to increase membership fees, Chief Financial Officer Richard Gallante again noted that the current timing is still not the average of the past three increases. Costco has historically increased membership fees every 5 years and 7 months, the next anniversary of which is January 2023. The company has pricing power to increase fees if desired, and the timing is the when, not if, situation. Another when the situation is Costco’s next special distributions, not if. The company has paid a special dividend 4 times in the past 8 years, most recently in November 2020. With nearly $11 billion in cash and cash equivalents on the balance sheet, Costco has plenty of potential to reward shareholders back. (Jim Cramer’s Charitable Trust is a long cost. See here for a full list of stocks.) 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Costco wholesale (COST) reported mixed results for the first quarter of the fiscal year after the closing bell on Thursday, amid weak consumer demand. But the club still sees the fundamentals of the business as solid and is encouraged by higher expected membership fees from the wholesale retailer and private profits.
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