Costco Earnings Call: Growth Amid Challenges

Costco Wholesale Corp. ((COST)) has held its Q3 earnings call. Read on for the main highlights of the call.

Costco’s recent earnings call highlighted a robust performance with notable growth in membership and e-commerce, alongside successful expansion of its warehouse network. Despite these achievements, the company faces challenges such as tariffs, LIFO charges, and fluctuations in renewal rates, which could pose potential headwinds.

Warehouse Expansion

Costco continues to expand its global footprint, having opened nine new warehouses in the third quarter, including strategic locations in Melbourne, Australia, and Japan. The company plans to open ten more warehouses in the fourth quarter, aiming to conclude the fiscal year with a total of 914 warehouses worldwide.

Record Membership Growth

The company reported a significant increase in membership fee income, which grew by 10.4% year over year to reach $1.24 billion. The total number of paid household members rose by 6.8%, totaling 79.6 million, indicating strong consumer loyalty and engagement.

Strong E-commerce Performance

Costco’s e-commerce segment showed impressive growth, with comparable sales up 14.8%, or 15.7% adjusted for foreign exchange. This growth was driven by strategic investments in technology and efforts to enhance personalized member experiences.

Kirkland Signature Growth

Sales of Kirkland Signature products outpaced overall sales growth, with sales penetration increasing by approximately 50 basis points year over year. This indicates a strong consumer preference for Costco’s private label offerings.

Gasoline Sales Milestone

Costco achieved two of its all-time highest gasoline sales weeks in the U.S., attributed to extended gas station hours and competitive pricing, which resonated well with consumers.

Impact of Tariffs and LIFO Charges

The company faced a $130 million LIFO charge in the third quarter due to non-food inflation and tariffs, with an additional $40-$50 million charge expected in the fourth quarter. These charges reflect ongoing challenges in managing costs amidst external economic pressures.

Challenges with Renewal Rates

Costco experienced a slight decrease in renewal rates in the U.S. and Canada, influenced by a Groupon promotion and a higher penetration of online sign-ups, which tend to renew at a lower rate.

SG&A Increase

Selling, general, and administrative expenses increased by 20 basis points year over year, primarily due to investments in employee wages and the opening of new warehouses, reflecting the company’s commitment to growth and workforce development.

Forward-Looking Guidance

Looking ahead, Costco anticipates continued expansion with plans to open additional warehouses, targeting a total of 914 by the end of the fiscal year. The company reported a net income rise to $1.9 billion, or $4.28 per diluted share, marking a 13% increase from the previous year. Despite facing LIFO charges and increased employee vacation accruals, Costco’s net sales grew by 8% to $61.96 billion. The company also launched a buy now, pay later program with Affirm to enhance customer purchasing power for larger purchases.

In summary, Costco’s earnings call revealed a strong performance with significant growth in key areas such as membership and e-commerce. While the company faces challenges from tariffs and renewal rate fluctuations, its strategic expansions and financial metrics indicate a positive outlook. Investors and market watchers will be keen to see how Costco navigates these challenges and capitalizes on its growth opportunities in the coming quarters.