Costco’s Q1 Fiscal 2021 Results Exceed Expectations

Outperforming most analysts already ambitious predictions, Costco Wholesale Corp. reported its operating results yesterday for the first quarter of fiscal 2021, ending Nov. 22. Net sales for the first quarter increased 16.9% to $42.35 billion from $36.24 billion last year.

Comparable sales for first-quarter fiscal 2021 were nearly 15% in the U.S. and more than 15% for the total Issaquah, Wash.-based company globally. Net income for the quarter was $1,166 million, or $2.62 per diluted share, compared to $844 million, or $1.90 per diluted share, last year.

While some industry analysts were quick to note that Costco’s October 2020 sales were more robust than those in November 2020, the majority are convinced Costco’s future is bright.

“It looks like sequentially October to November 2020, comparable sales rose 13.4%. While still up significantly, they do lag the 16.9% annualized first-quarter increase,” Jay Jacobowitz, president and founder of Retail Insights, told WGB. “I am not too concerned, since on an absolute dollar basis, a 13.4% increase in comparable sales still reflects a huge increase over pre-COVID comparable sales trends. And the late-fall moderating comparables for Costco are occurring for other grocers and retailers as well, as none is able to maintain the blistering pace of the panic-driven buying of the spring and summer.”

And in a holiday season focused on smaller gatherings and mini feasts, traditional grocery stores may have usurped Costco as the one-stop-shop destination of choice in November.

“Costco’s assortment—weighted heavily toward large, multi-usage pack-sizes—may not be the most relevant for shoppers’ holiday gift lists compared to other more gift-oriented retailers,” says Jacobowitz. “Still, Costco’s absolute comparable sales increases are orders of magnitude greater than pre-COVID comparables.”

“Costco performed even better than we had estimated in our recently raised outlook,” wrote R5 Capital analysts Scott Mushkin and Matt Siler in a recent report, which touted the warehouse chain as “one of the best retailers” globally. “This was driven by gross margins that exceeded our forecast because of strong core merchandise sales and much lower spoilage in fresh foods, due to very high velocity.”

Barclays analysts agree. “While many investors remain, understandably, focused on tough [year over year] top line compares and lumpiness on results into calendar 2021, we remain focused on recommending best-in-class names in our coverage universe, with a view as to whether or not the pandemic has led to structural and sustainable market share gains,” said the Barclays report. “[Costco] has clearly gained share, and we believe these gains are structural and sustainable, even though we acknowledge the next several quarters could prove to be volatile on the top-line. …[Costco] is clearly a permanent share gainer given its appeal on quality, value and experience [in any environment], with strong momentum into calendar 2021.”

Costco also reported surging e-commerce sales for first-quarter fiscal 2021 of 86.4%. Interestingly, during a recent virtual presentation to investors, Costco CFO Richard Galanti indicated that Costco was reluctant to expand its e-commerce role, and wasn’t especially interested in expanding online delivery or curbside pickup.

“I believe Costco CEO Galanti is right to avoid expanding online delivery and pickup, which will siphon business away from the physical stores,” said Jacobowitz. “Costco’s model of selling at cost plus the 2% membership fee is enticement enough to keep membership growing and shoppers shopping. In addition, the assortment pack sizes are large, intended for repeated use over time, not single-use packages. Costco customers are stocking up for extended usage periods, not impulse ordering dinner at the last minute, for example. Therefore, Costco customers don’t require two-hour, or same-day delivery or pickup, and Costco won’t be losing that business.”

This year’s first-quarter results also reflect an expense for COVID-19 premium wages of $212 million pre-tax or 35c cents per diluted share, notes Costco, which currently operates 803 warehouses, including 558 in the United States and Puerto Rico, 102 in Canada, 39 in Mexico, 29 in the United Kingdom, 27 in Japan, 16 in Korea, 14 in Taiwan, 12 in Australia, three in Spain, and one each in Iceland, France and China. Costco also operates e-commerce sites in the U.S., Canada, the United Kingdom, Mexico, Korea, Taiwan, Japan and Australia.

With soaring profits since the start of the pandemic, what is the true impact of premium pay to Costco’s first-quarter fiscal 2021 bottom line?

“Costco’s net income of $1.166 billion for the quarter is 2.67% of its $42.35 billion in quarterly sales; actually higher as a percentage by 0.67 percentage points from its long-term average net income percentage of about 2%,” Jacobowitz says. “So the vast increase in top-line sales in the quarter more than offset the additional COVID-related labor expenses, including premium pay.”