Costco upholds sales momentum in third quarter

In its fiscal 2022 third quarter, Costco Wholesale tacked double-digit net and comparable sales growth onto more than 20% gains a year ago.

For the 12 weeks ended May 8, net sales totaled $51.61 billion, up 16.3% from $44.38 billion a year earlier, Costco reported yesterday after the market close. Comp sales surged 14.9% overall ( 10.8% excluding fuel and foreign exchange), including increases of 16.6% in the United States ( 10.7% excluding fuel and FX), 15.2% in Canada ( 12.8% excluding fuel and FX) and 5.7% internationally ( 9.1% excluding fuel and FX). 

The fiscal 2021 quarter, also 12 weeks, saw net sales rise 21.7% and overall comp sales grow 20.6% ( 15.1% excluding fuel and FX), with comp sales up 18.2% in the U.S. ( 15.2% excluding fuel and FX). 

“In terms of Q3 comp metrics, traffic or shopping frequency increased 6.8% worldwide and 5.6% in the U.S. Our average transaction was up 7.6% worldwide and up 10.4% in the U.S. during the quarter,” Bob Nelson, senior vice president of finance and investor relations at Costco, told analysts in a conference call late Thursday.

Costco Grocery delivery service generated low double-digit comp-sales growth in Q3. (Image courtesy of Costco)

Changes in FX rates negatively impacted comp sales just over 1%, while gasoline price inflation accounted for a little more than 5% lift in fuel sales during the third quarter, Nelson reported.

Related:Costco Q2 builds on robust prior-year gains

“The best-performing categories in Q3 were candy, sundries, tires, toys, jewelry, kiosks, home furnishings, apparel, bakery and deli. Underperforming departments were liquor, office, sporting goods and hardware, all of which were quite strong a year ago,” he said. “In terms of other business sales, the best performers came in from gasoline, travel, food courts and our business centers. So, overall, our sales grew nicely in the quarter and, for the most part, were pretty broad-based.”

Inflation continued to escalate through the third quarter, as pressures from higher commodity prices, higher wages, higher transportation costs and supply chain disruptions are “all still in play,” according to Nelson.

“For Q1, we estimate price inflation was in the 4.5% to 5% range. For Q2, we had estimated 6%-ish, if you will. And for Q3, and talking to our merchants, estimated price inflation was in the 7%-ish range,” he explained. “However, we did see inflation in fresh foods come in slightly lower in Q3 versus Q2 a year ago, as we began cycling high meat prices. We believe our solid sales increases and relatively consistent margins show that we have continued to strike the right balance in passing on higher costs.”

Related:Costco elevates Ron Vachris to president, COO

Costco generated further e-commerce growth in the 2022 third quarter, with digital sales on a comparable basis rising 7.4% ( 7.9% excluding FX) atop a 41.2% jump ( 38.2% excluding FX) in the prior-year period.

For fiscal 2022, Costco expects to open 27 new warehouse clubs, including three relocations.

“Stronger departments in the quarter were special order, patio and garden, jewelry and home furnishings,” Nelson said of e-commerce sales. “Our largest e-comm merchandise department, which includes consumer electronics, appliances, TVs, was up a little bit better than mid-single digits on a very strong sales increase a year earlier. And Costco Grocery, including our third-party delivery, two-day dry, fresh and frozen, continues to grow, up low double digits in the quarter.”

Costco’s membership fee revenue in the third quarter rose 9.2% year over year (10.4% excluding FX) to $984 million, or 1.91% of sales. The worldwide renewal rate edged up 0.4% from the end of the second quarter to 90% in the third quarter, reflecting a 92.3% rate in the U.S. and Canada. Year over year, total membership rose just over 6% to 64.4 million paid households.

“Historically, we’ve raised fees every five to six years, with the last three increases coming on average at about the 5.5-year time frame, and our last increase coming in June of 2017. As we approach this 5.5-year mark, there will be more discussions with Craig [Jelinek, CEO], Ron [Vachris, president and COO] and the executive team. But for today, we have nothing more specific to report in terms of timing,” Nelson said in the call. “In addition, given the current macro environment, the historically high inflation and the burden it is having on our members and all consumers in general, we think increasing our membership fee today ahead of our typical timing is not the right time.”

At the bottom line, third-quarter net income attributable to Costco was $1.35 billion, or $3.04 per diluted share, compared with $1.22 billion, or $2.75 per diluted share, a year ago. Costco noted that the 2022 quarter included a one-time $77 million pre-tax charge (13 cents per diluted share) for incremental benefits awarded under a new employee agreement effective March 14.

Analysts, on average, had projected adjusted earnings per share of $3.03, with estimates ranging from $2.80 to $3.38, according to Refinitiv.

“In Q3, we opened one net new warehouse plus two relocations. Q3 year-to-date, we have opened 17 warehouses, including three relocations, for a net of 14 new warehouses so far this fiscal year,” Nelson told analysts. “In Q4, we expect to open an additional 10 new warehouses, which will put us at 27 for the year, including three relocations, for a net of 24 new warehouses for all of fiscal year 2022. The 24 new warehouses by market are 14 in the U.S., two in Canada, and one each in Korea, Japan, Australia, Mexico, Spain, France, China and our first opening in New Zealand, which will occur in August of this year.

“In terms of the new openings this year, this is four fewer than what we projected in Q2,” he added. “Two of the four were impacted by supply chain issues related to electrical equipment, and the other two have been delayed due to third-party site development issues. All four of these buildings are now scheduled to open by the end of November.”

Issaquah, Wash.-based Costco currently operates 830 warehouse clubs overall, compared with 809 a year ago. By market, the retailer operates 574 clubs in the U.S. and Puerto Rico, 105 in Canada, 40 in Mexico, 30 in Japan, 29 in the United Kingdom, 16 in Korea, 14 in Taiwan, 13 in Australia, four in Spain, two each in France and China, and one in Iceland. Costco also runs e-commerce sites in the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia.