Costco (COST) Q4 2023 Earnings

Costco reported quarterly earnings on Tuesday that beat Wall Street expectations as shoppers turned to the membership club for groceries but bought less expensive items.

In an earnings call, Chief Financial Officer Richard Galanti said shoppers made more trips to the retailer’s stores even though they spent less. He said sales of more expensive items in the U.S., aside from groceries, were weaker and falling gasoline prices were also weighing on sales.

Traffic increased 5.2% globally and 5% in the U.S. year-over-year. Costco’s average transaction amount fell nearly 4% globally and 4.5% in the U.S. in the quarter, he said.

Here’s what the membership-based warehouse club reported for the three-month period ended September 3 compared to analyst expectations, according to consensus estimates from LSEG, formerly known as Refinitiv:

• Earnings per share: $4.86 versus expected $4.79
• Revenue: $78.9 billion versus expected $77.9 billion

Costco’s net income rose to $2.2 billion, or $4.86 per share, in its fiscal fourth quarter, compared with $1.87 billion, or $4.20 per share, a year earlier.

The company’s comparable sales rose 1.1% year-over-year, but only 0.2% in the U.S. Excluding changes in gas prices, the metric rose 3.8% overall and 3.1% in the U.S.

Costco has gained momentum over the past three years as membership-based warehouse clubs benefited from dynamics such as more Americans cooking from home during the pandemic and more Millennials moving into suburban homes with larger pantries. Inflation has also prompted some shoppers to sign up for clubs and renew their memberships Walmart-own Sam’s Club and BJ’s Wholesale Club.

These favorable membership trends continued in the quarter. Costco ended the period with 71 million paid household members, up nearly 8% from a year ago. This growth exceeded the number of new openings, which increased by almost 3%.

Costco has also attracted more of these members to its more expensive membership. The higher tier, called Executive Membership, costs $120 annually compared to $60 for the typical annual membership and includes some additional perks.

At the end of the quarter, Costco had 32.3 million paid board memberships, an increase of 981,000 since the end of the previous quarter. These higher-level members now make up a little more than 45% of all paid members, Galanti said. They also account for about 73% of global sales, he said.

In recent quarters, even Costco has talked about consumers holding back on some expensive and unneeded items as grocery bills and housing costs remain high.

This trend has particularly impacted Costco’s digital sales. E-commerce sales fell 0.8% compared to the same period last year. In announcing its earnings, Galanti said customers are buying fewer items that tend to make up a larger portion of the company’s online sales, such as furniture, small electronics and jewelry.

However, some discretionary items have appeared on the company’s website, Galanti said. Sales of home appliances rose more than 30% year over year in the quarter. And, he added, the company has had difficulty keeping a new offering in stock: one-ounce gold bars.

“When we load them onto the site, they are usually gone within a few hours and we limit two per member,” Galanti said.

Costco followed a trend also seen at competing retailers Walmart And Goal: Grocery is the category that drives sales.

Costco has also been trying new approaches to get customers to put more items in their basket when shopping in the non-grocery aisles, Galanti said. The retailer has added small-ticket items, such as lower-priced, impulse-driven snacks.

By offering popular gaming systems and introducing holiday items early, the company has kept the merchandise fresh. So far, trees, toys and decorations have sold well, Galanti said.

In the U.S., Costco’s largest market, sales trends have slowed. Most of Costco’s clubs – nearly 600 of the company’s 861 warehouse locations – are located in the United States and Puerto Rico.

In the fourth fiscal quarter last year, U.S. comparable sales rose 15.8%, but they have largely slowed since then. In the last two quarters, comparable sales – an industry measure that strips out the impact of store openings and closings – remained roughly flat in the U.S. compared to prior-year periods.

Investors had expected a costco membership fee increase, but that didn’t happen. The last increase occurred in June 2017, and based on its usual practice, the retailer should increase it in early 2023. These fees account for the majority of Costco’s revenue.

On the earnings call, an analyst asked whether a fee increase was part of the retailer’s financial plan.

Galanti said an increase in membership fees is “a question of when, not if.” However, he declined to specify when that might be.

Additionally, Costco plans to open 10 new stores in the next three months, including nine in the U.S. and one in Canada, Galanti said. He said the company ended the fiscal year with a net 23 new locations, including stores in China, Japan and Australia.

Costco shares have risen about 21% so far this year, outpacing the 11% gains for the S&P 500. The company’s shares closed at $552.96 on Tuesday, down about 1%.