Costco’s E-Commerce Explosion

Costco’s net sales for second-quarter fiscal 2021 increased 14.7% to $43.89 billion from $38.26 billion a year ago, the warehouse chain reported during an earnings call yesterday. And while its second quarter’s gross margin came in at 10.96%, 2 basis points lower than last year’s second quarter of 10.98%, its net income for the quarter was $951 million, or $2.14 per share, compared to $931 million, or $2.10 per diluted share, last year.

But it was e-commerce, with sales up 75.8%, where Costco really showed a strong second-quarter performance. The growth in online sales is particularly notable given past comments by Costco EVP and CEO Richard Galanti, which seemed to suggest Costco wouldn’t pursue the e-commerce channel with the same ardor as its competitors.

“Total online grocery grew at a very strong rate in the second quarter,” said Galanti, according to a Sentieo transcript of the earnings call. However, the nearly 76% increase in e-commerce sales does not include Costco’s third-party same-day grocery program, which was up 450% year over year for the second quarter. “If we include the third-party same-day in our e-comm comps, the 76% reported comp number would have been 96%,” said Galanti. Costco also saw particularly robust online sales from over the counter and pharmacy, garden and patio, small electrics, health and beauty, and categories such as consumer electronics.

Costco only recently began testing curbside pickup at three of its locations in Albuquerque, N.M. The tests, which launched in January, are “ongoing” and “going well,” Galanti reported on the call. “Our members have responded to it, and basket size has actually surpassed our expectations. Our focus, of course, is how can we be more efficient in doing it and determining if this offering can become scalable and makes firm sense for us,” he added.

Costco is also readying to ramp up its physical footprint. While there were no new Costco warehouse openings in the second quarter, there were eight net new openings in the preceding quarter. By the fourth fiscal quarter, Costco plans to open 13 more new units, five in the U.S., three in Canada and five overseas.

With shoppers reducing the frequency of trips to the store in a pandemic, many grocers, including Costco, are reporting bigger baskets. Costco’s average transaction was up 11.9% companywide and 8.5% in the U.S. during the second quarter. Also helping to boost the bottom line, Costco’s memberships were up. Membership fee income for second-quarter 2021 was $881.5 million, up $65 million from $816.4 million in the quarter a year ago. Membership renewal rates were 91% for the time period.

Once again fresh foods were the biggest driver in Costco’s core merchandise categories, with sales up more than 20%. Meat and deli were the strongest performing departments in fresh. Across the store in food and beverage, liquor, frozen foods and cooler departments all posted strong sales.

Some of Costco’s second-quarter sales success were tempered by COVID-related expenditures. Costco’s net income for the quarter included $246 million pretax, or 41 cents per diluted share, and costs incurred primarily from COVID-19 premium wages, reports the company.

Companywide, Costco spent about $1.60 billion pretax on COVID-related items. Of this amount, approximately $825 million related specifically to the $2-an-hour extra hourly pay, said Galanti. The remaining more than $200 million was due to several factors, including a “few month period where employees 65 and older were paid to stay home” early in the lockdowns, he added.

Costco recently announced it was permanently increasing its starting wage $1 an hour in the U.S. and Canada, as well as increasing the scale of its hourly wage by 45 cents an hour on top of the previously planned 55 cents an hour increase for top of scale. Entry level hourly wages will increase from $15 and $15.50 an hour to $16 and $16.50 an hour.

Despite the pandemic-related expenses, Galanti reported, “overall, relatively a good fiscal second quarter” for Costco.