Costco sales climb in Q1 despite earnings miss

Costco Wholesale posted fiscal 2023 first-quarter sales growth in line with its quarterly preview last month but saw earnings per share fall a few cents short of Wall Street’s EPS forecast.

Net sales for the 12-week quarter ended Nov. 20 totaled $53.44 billion, up 8.1% from $49.42 billion a year earlier, Costco reported Thursday after the market close. The increase came atop a 16.7% net sales gain in the fiscal 2022 quarter.

Overall comparable sales in the first quarter rose 6.6% year over year ( 7.1% adjusted, excluding fuel and foreign exchange), reflecting upticks of 9.3% in the United States ( 6.5% adjusted) and 2.4% in Canada ( 8.3% adjusted) and a 3.1% decline internationally ( 9.1% adjusted). A year ago, Costco said comp sales advanced 15% ( 9.8% adjusted), including an uptick of 14.9% in the U.S. ( 9.9% adjusted).

The net- and comp-sales growth matched preliminary Q1 results that Costco included  in its November sales report. In that announcement, the Issaquah, Washington-based warehouse club chain also reported sales results for 13-week period ended Nov. 27, extending through the Thanksgiving holiday weekend. Over that span, net sales climbed 7.9% to $58.36 billion, while total comps rose 6.4% ( 6.9% adjusted), with an 8.8% uptick ( 6.3% adjusted) in the U.S.

“In terms of first-quarter comp sales metrics, traffic or shopping frequency increased 3.9% worldwide and was up 2.2% in the U.S.,” Chief Financial Officer Richard Galanti told analysts in a conference call late Thursday, according to a Refinitiv transcript from financial services site Sentieo. “Our average transaction size was up 2.6% worldwide and 6.9% in the U.S. during the first quarter. And foreign currencies relative to the U.S. dollar negatively impacted sales by a little over 3%, while gasoline price inflation positively impacted sales by approximately 2.5%.”

Costco has upheld competitive pricing in fresh foods despite ongoing margin pressure and aggressive promotions by other retailers. / Photo: Shutterstock

Galanti noted that core merchandise’s contribution to gross margin, on a reported basis, was 52 basis points lower year over year and 31 points excluding fuel inflation.

“In terms of the core margin on their own sales, in the first quarter, our core-on-core gross margin was also lower by 31 basis points, with food and sundries being up a little bit, offset by nonfoods and fresh foods being down,” he explained. “Fresh foods was down. As you know, for the last couple of years, it has been particularly strong, and it has come down a little bit. In addition, we are looking to hold prices on some of those price points despite inflated costs in some of the fresh food categories. Ancillary and other business gross margins were higher by 23 and higher by 30 basis points ex-gas inflation in the quarter, with gas business centers and travel up year over year, offset in part by e-com, food courts and optical.”

Responding to an analyst’s question, Galanti noted that in fresh food it’s key to maintain price parity in the consumers’ eyes.

“We want to be the most competitive, and we can drive a lot of volume. And again, we’re in it for the long term," he said. "Fresh is one of those unique areas where prices on many items do change almost weekly, if not sooner. So our buyers are always looking at the supermarket ads as well as the other warehouse club pricing, and we react to that. But part of it is also consciously keeping the price on the chicken at $4.99 and those types of things, keeping the price on the hotdog. All those things go into that equation as well. But we know that, that can be a driver of business, fresh, we got great stuff, and people do notice the price. In our view, people notice those price differences.”

Costco hasn’t observed any big shift toward private label, i.e. the Kirkland brand, in food.

“We don’t see currently a lot of trade-down on fresh. Prices have started to come down on some of those items as the underlying commodity costs have come down a little bit,” Galanti said in response to another analyst question. “Kirkland Signature penetration is up. I don’t have the exact number in front of me. I’m guessing it’s about somewhere approaching a percentage point, but I would say, over the last several years, it’s probably been 0.5 percentage point. Somebody had asked us recently, ‘Are you seeing some trade-down to private label?’ And we, of course, corrected them and said it’s a trade-up.”

E-commerce sales for the 2023 first quarter dipped 3.7% overall and 2% excluding FX, compared with prior-year gains of 14.3% and 13.3% adjusted. “What we don’t include in this number is our sales through same-day delivery for fresh food with our partners like Instacart, and they are fulfilled in our warehouse,” Galanti said. “Our e-com comps, ex-FX, would have been [up] in the positive low-single digits if we included it.”

In fiscal 2023, Costco expects to open 24 net-new warehouse clubs overall, including 15 in the U.S. / Photo: Shutterstock

Top-performing departments by comp sales included gift cards, tires, candy and health-and-beauty aids, while majors — the largest merchandise department by sales, ranging from consumer electronics to appliances — fell by high single digits in comp sales. “Subsequent to quarter-end, we did have our two biggest e-com selling days in our company history, both on Black Friday and Cyber Monday,” Galanti added.

Membership fee income grew 5.7% to $1 billion in the first quarter but excluding the impact of FX would have risen by slightly over 9%, compared with the prior-year gain of 9.9%. Total paid member households increased to 62.5 million and the total cardholder count to 113.1 million quarter to quarter, both up 7% versus a year ago.

At the bottom line, Costco posted 2023 first-quarter net income of $1.36 billion, or $3.07 per diluted share, compared with $1.32 billion, or $2.98 per diluted share, a year ago. Analysts, on average, had projected Q1 adjusted EPS of $3.11, with estimates ranging from a low of $2.64 to a high of $3.77, according to Refinitiv.

“This year's results included a charge of $93 million pretax, or 15 cents per share, primarily related to downsizing our charter-shipping activities, and a tax benefit of $53 million, or 12 cents per diluted share, related to stock-based compensation,” Galanti said. “The strength of the U.S. dollar resulted in our foreign company earnings translating into fewer U.S. dollars,” he added. “With 25% to 30% of our earnings generated outside of the United States, this negatively impacted earnings by about 12 cents per share.”

Costco opened seven net-new warehouse clubs in the first quarter, including four in the U.S., one apiece in Korea, New Zealand and Sweden, with the latter two marking new countries for the retailer. In fiscal 2023, the company aims to open 27 new clubs and complete three relocations, for a net of 24 new stores, including 15 in the U.S.

Currently, Costco operates 845 warehouse clubs overall, compared with 828 a year ago. By market, the retailer has 582 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, 13 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.