Costco’s sales growth tapers off in second quarter

Costco Wholesale saw net and comparable sales growth tail off sequentially in its fiscal 2023 second quarter, including its second consecutive quarter of decreased online sales, the retailer announced Thursday.

At the bottom line, Issaquah, Washington-based Costco posted adjusted earnings per share (EPS) at the higher end of Wall Street’s forecast.

Net sales for the 12-week quarter ended Feb. 12 came in at $54.24 billion, up 6.5% from $50.94 billion a year earlier, Costco reported. The gain compared with a 16.1% jump in the fiscal 2022 second quarter and an 8.1% increase in the fiscal 2023 first quarter.

Overall comparable sales rose 5.2% year over year (6.8% excluding fuel and foreign exchange) after upticks of 14.1% (12.4% excluding fuel and FX) a year ago and 6.6% (7.1% excluding fuel and FX) in Q1 2023.

By business unit, Costco reported fiscal 2023 Q2 comp-sales increases of 5.7% in the United States (5.8.% adjusted), 3.5% in Canada (9.6% adjusted) and 3.8% internationally (9.5% adjusted). U.S. comp sales grew by 15.8% in fiscal 2022 Q2 and by 9.3% in fiscal 2023 Q1.

Costco's e-commerce sales declined 9.6% for Q2 after a 3.7% downturn in Q1. / Photo: Shutterstock.

“In terms of second-quarter comp-sales metrics, traffic or shopping frequency increased 5% worldwide and 3.7% in the United States. Our average transaction or ticket was up 0.2% worldwide and up 1.9% in the U.S. during Q2,” Chief Financial Officer Richard Galanti told analysts in a conference call late Thursday. “Foreign currencies relative to the dollar negatively impacted sales by approximately 1.8%, and gasoline price inflation positively impacted sales very slightly, by approximately 0.2%.” (Call transcript provided by AlphaSense.)

Though Costco’s second-quarter gross margin was higher year over year by 8 basis points (9 basis points excluding fuel inflation), core merchandise gross margin was down 6 basis points, according to Galanti.

“In terms of core margin on their own sales, our core-on-core margin, it was lower year over year by 26 basis points. Most major departments in general were down, with fresh foods being down a little more than others. We are continuing to hold or drop prices where we can to drive traffic and improve our competitive advantage,” he explained.

“Overall, core sales benefited from sales shifting from ancillary and other businesses to core. Ancillary and other business gross margins, again, were higher by 2 basis points and 3 basis points [respectively] ex-gas in the quarter,” Galanti said. “Gas business centers and travel were better year over year, offset in part by e-com and pharmacy.”

Online sales dropped 9.6% (-8.7% adjusted) year over year in the second quarter, following a 3.7% decrease (-2% adjusted) in the first quarter, according to Costco. That compared with double-digit growth (12.5%, 12.6% adjusted) for Q2 2022.

“E-commerce sales in Q2 ex-FX decreased 8.7%. This weakness was driven mostly by our online mix of sales,” Galanti said. “Big-ticket discretionary departments like majors, home furnishings, small electrics, jewelry, hardware, these were down 15% in the quarter and make up 58% of our e-com sales. These same departments, by the way, were down 11% in-warehouse but only make up 8% of total warehouse in-line sales.”

Chief Financial Officer Richard Galanti said a membership fee increase is upcoming. / Photo: Shutterstock

In a Q&A with analysts during the call, Galanti noted that Costco has been able to use its business model to widen its price gap with competitors.

“I think we’re fortunate in the sense that we’ve got various types of businesses within our business—from big-ticket, discretionary items to food and sundries, health and beauty aids, and fresh foods, which is really driving the cart right now, more so than it has in the past,” he said.

Costco also is keeping close tabs on its competition, Galanti added. “Our locations do weekly comp shops of 100 to 150 key items, all directly competitive items, against our direct competitors, other limited comp shops and other forms of traditional retail where the gap of competitiveness is much greater. But at the end of the day, our relative level of competitiveness is as strong as it’s ever been. And at every four-week monthly, two-day budget meeting, each of the regional operations and senior executives get up and show those numbers, and you can rest assured we’re going to continue to do that.”

Responding to an analyst’s question on private label, Galanti said Costco’s Kirkland Signature brand recently has seen a bigger price delta with competing labels.

“That’s a trade-up or a trade-equal, not a trade-down,” he explained in the call. “But at the end of the day, we have seen actually in the last few months a bigger delta than normal. I’d say, over the last 10 years, we see a little less than 0.5% a year of increased penetration. For this quarter, year over year, we’ve seen about a little over 1.5% increase in sales penetration on the food side. And I guess that’s consistent with the concession that most people are looking to save money—and of course if it’s our brand, that’s great. That creates loyalty.”

Membership fee income rose 6.2% to $1.03 billion in the 2023 second quarter, Costco said. At the period’s end, the retailer had 68.1 million paid household members and 123.0 million cardholders, both up more than 7% versus a year ago.

Asked by an analyst if Costco was planning to raise its membership fee, Galanti indicated that the retailer is due to do so. June would mark the sixth year since Costco last raised its fee, he pointed out.

Fresh foods are "really driving the cart right now, more so than it has in the past,” according to CFO Galanti. / Photo: Shutterstock

“Looking at the last three [fee increases], they averaged around five years and seven months, which is about now or last month,” he said. “And, well, what we said over the last few quarters is that, in our view, it’s a question of when—not if—and so we’ll let you know.”

On the earnings side, Costco posted fiscal 2023 second-quarter net income (attributable to Costco) of $1.47 billion, or $3.30 per diluted share, compared with $1.3 billion, or $2.92 per diluted share, in the 2022 quarter.

Analysts, on average, had projected Costco’s Q2 adjusted EPS at $3.21, with estimates ranging from $3.03 to $3.41, according to Refinitiv.

“With consumer discretionary spending weakening and Costco now lapping strong sales figures from the last few years, it is possible we will see low-single-digit U.S. comp sales [growth] over the next several months,” CFRA Research analyst Arun Sundaram wrote in a research note Friday on Costco’s Q2 results. “Other metrics were strong, including membership growth ( 7%), renewal rates (92.6% U.S./Canada) and Executive membership penetration. We view a membership fee increase as imminent but believe Costco will reinvest most of this gain into lowering merchandise prices for its members, ultimately driving further membership growth and store traffic.”

Also on Thursday, Costco reported February sales. For the four weeks ended Feb. 26, net sales grew 4.7% to $17.06 billion from $16.29 billion a year earlier. Comp sales for the month edged up 3.5% overall and were up 5% excluding fuel and FX. Traffic for the month grew 4.9% worldwide and 3.1% in the U.S., Galanti reported. Globally, the average transaction size dipped 1.3%.

By business segment, February comp sales increased 3.4% in the United States (3.5% adjusted), 1.2% in Canada (7.3% adjusted) and 6.5% internationally (11.5% adjusted). February e-commerce fell 11.2% on a comparable basis (-10.3% adjusted).

CostcoCostco added three new clubs in the second quarter (two in the U.S. and one in Australia) and plans to open 27 new clubs overall in fiscal 2023, including three relocations.

“These 24 planned new openings are made up of 14 in the U.S. and 10 in other international,” Galanti said. “The 10 in other international [new clubs] include three in China along with our first Costcos in New Zealand and Sweden, both of which were opened during the fiscal first quarter.”

Costco finished the quarter with 848 warehouse clubs overall, compared with 828 a year ago. By market, the retailer operates 584 clubs in the U.S. and Puerto Rico, 107 in Canada, 40 in Mexico, 31 in Japan, 29 in the United Kingdom, 18 in Korea, 14 in Taiwan, 14 in Australia, four in Spain, two apiece in France and China, and one each in Iceland, New Zealand and Sweden. Costco also runs e-commerce sites in the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia.