Costco’s Holiday-Quarter Revenue Falls Short Despite Online Expansion

Costco fell short of Wall Street’s revenue expectations for its holiday quarter, although it reported year-over-year sales growth and robust e-commerce gains. Aftermarket trading saw a decline of about 4% in the retailer’s shares, despite hitting a 52-week high earlier in the day.

Here’s what Costco reported for its fiscal second quarter of 2024 compared to Wall Street estimates, based on a survey of analysts by LSEG, formerly known as Refinitiv:

– Earnings per share: $3.92 vs. $3.62 expected
– Revenue: $58.44 billion vs. $59.16 billion expected

In the three months ending February 18, Costco’s net income surged to $1.74 billion, or $3.92 per share, from $1.47 billion, or $3.30 per share, a year earlier. Revenue for the quarter rose to $58.44 billion from $55.27 billion in the same period the previous year.

Comparable sales for the company increased by 5.6% year over year and by 4.3% in the U.S. Excluding changes in gas prices and foreign currency, the metric increased by 5.8% overall and by 4.8% in the U.S.

CFO Richard Galanti noted on the earnings call that sales of food and sundries, which include snack foods and beverages, saw mid-single-digit growth in the quarter. Fresh foods saw high single-digit growth, while non-foods experienced mid-single-digit growth.

Ancillary businesses, such as the food court, pharmacy, and optical centers, performed well in the quarter, while gas sales declined as the price per gallon fell. More shoppers visited Costco and spent more during their trips, with global traffic increasing by 5.3% and U.S. traffic by 4.3%. The average ticket size also increased both in the U.S. and globally.

Galanti mentioned that inflation remained relatively flat year over year, allowing the retailer to reduce prices on some items. For instance, prices of reading glasses dropped from $18.99 to $16.99, and a 48-count pack of Kirkland Signature batteries decreased from $17.99 to $15.99. In the prior quarter, inflation was as high as 1% year over year.’

E-commerce sales surge 18.4% in the quarter, showcasing digital momentum.

Costco’s expansion continued with the opening of four new clubs in the second quarter, including three in the U.S. and one in Shenzhen, China. This marked the sixth club opening in China. Two of the three new U.S. locations were Costco Business Centers, catering specifically to small business owners like restaurant operators.

As of Thursday’s close, Costco shares have surged nearly 19% since the beginning of the year, touching a 52-week high of $787.08 earlier in the day and closing at $785.59, bringing the company’s market value to nearly $350 billion.

Costco has been actively enhancing its digital presence to enhance the online shopping experience, according to Galanti. The company has implemented changes to its website and adjusted its operations to embrace digital initiatives.

In the recent quarter, e-commerce sales surged by 18.4% compared to the previous year. One notable improvement is the introduction of a new mobile app homepage in February, significantly reducing loading time to less than two seconds from the previous eight seconds.

Galanti emphasized the importance of this update, as approximately 60% of Costco’s e-commerce transactions occur through its mobile app and browser. Last week, Costco expanded its payment options by introducing Apple Pay for all online members.

Costco Membership
Membership sign-ups rise as Costco cracks down on sharing, anticipating fee hikes.

Additionally, the retailer is expanding its product range on Costco Next, a platform allowing members to purchase directly from Costco’s suppliers at discounted rates. This marketplace features a diverse selection of items, including electronics, bicycles, and apparel.

Galanti highlighted Costco’s success in promoting the value of its online products, particularly for significant purchases such as appliances, mattresses, and tires, which has contributed to the growing momentum of e-commerce sales.

The company witnessed a significant increase in app downloads, with 2.8 million downloads in the quarter, bringing the total number of downloads to approximately 33 million, as per Galanti’s remarks.

Costco has observed an uptick in membership sign-ups as it takes a stricter stance on membership sharing, according to Galanti. During the pandemic, the warehouse club noticed an increase in individuals using their parents’ or family members’ membership cards, which was initially overlooked. However, membership sharing became more prevalent with the rise of self-checkout options at clubs.

Galanti mentioned that Costco is now implementing stricter checks on membership cards to ensure they match the shopper. While acknowledging that this initiative has led to some new sign-ups, he noted that it’s not significantly impactful relative to the club’s large membership base of 60 or 70 million. Nonetheless, he emphasized that it’s a fairer approach and the right thing to do.

Comparatively, Galanti highlighted that membership sharing at Costco wasn’t as prevalent a problem as it was at Netflix, which also faced crackdowns. He explained that Costco members still needed to physically present someone else’s card when entering the store, making it more challenging to share memberships compared to online streaming platforms.

Investors have been anticipating a potential increase in Costco’s membership fees for over a year. Historically, the company has raised its annual fees approximately every 5½ years, with the last hike occurring in June 2017. However, Galanti stated that there are no immediate plans for a fee hike, though he hinted that it’s a matter of when not if.

As Galanti prepares to retire, he humorously mentioned during the earnings call that the task of raising membership fees will fall to his successor, Gary Millerchip, the former CFO of Kroger, who is set to take over in mid-March. “I’ve been joking with Gary, it will be on his watch, not mine,” Galanti quipped.

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
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