Costco sees start of e-commerce improvement in Q4

Costco Wholesale’s fiscal 2023 fourth-quarter report included its fourth-straight quarter of e-commerce sales decreases. But that trend has begun to change, according to Chief Financial Officer Richard Galanti.

Issaquah, Washington-based Costco reported Tuesday that online sales were down 0.8% (-0.6% excluding foreign exchange) in the quarter, which had an extra week versus a year earlier. That followed declines of 10% (-9% adjusted) in Q3, 9.6% (-8.7% adjusted) in Q2 and 3.7% (-2% adjusted) in the first quarter of fiscal 2023, which came after a 7.1% gain ( 8.4% adjusted) in fiscal 2022 Q4.

Fiscal 2023 e-commerce sales were down by 5.7% (-4.8% adjusted), compared with growth of 10.1% ( 10.4% adjusted) on a comparable basis in 2022, when online sales accounted for about 7% of Costco’s total net sales.

“E-commerce sales in the [2023] fourth quarter ex-FX decreased 0.6% year over year. While still negative, relatively speaking, our e-commerce showed good improvement this quarter versus our year-over-year results in Q2 and Q3,” Galanti told analysts on Tuesday in a conference call on Q4 results. “In the previous two fiscal quarters, big-ticket discretionary, majors, home furnishings, small electrics, jewelry and hardware were down 15% and 20% year over year, respectively, and down just 5% year over year in the fourth quarter, with those big-ticket departments making up over half of our e-commerce sales.”

Related:Costco added $15B to top line in fiscal 2023

Also among big-ticket discretionary items, online sales of appliances jumped over 30% in the fourth quarter, and Costco has seen quick sellouts of one-ounce gold bars—from suppliers PAMP Suisse in Switzerland and Rand Refinery in South Africa—on its website, Galanti reported.

Richard Galanti, Costco Wholesale chief financial officer. / Photo courtesy of Costco

“I’ve gotten a couple of calls that people have seen online that we’ve been selling one-ounce gold bars. Yes, but when we load them on the site, they’re typically gone within a few hours, and we limit two per member,” he said.

Meanwhile, the Costco Next “endless aisles” e-marketplace has kept expanding. Introduced in 2017, the Costco Next e-commerce program allows members to buy items at a savings directly from a curated selection of vendors. The third-party suppliers handle shipping, customer service and returns.

“I’ll point out Costco Next. We continue to grow that,” Galanti said. “We currently have 62 suppliers on costconext.com, and we’re continuing to on-board additional ones in many product areas, from home improvement to apparel, to pet, to home and kitchen, to electronics and accessories, to sports and bicycles and toys and the like.”

Related:Costco’s sales pace gets more brisk in August

Costco also is making more headway with mobile e-commerce, though Galanti noted that the retailer remains “in the early innings” of its digital mobile transformation efforts

“Progress is being made. In terms of recent additions and upgrades, we’ve redesigned the account page in the Digital Membership Card. We also redesigned the header with a larger search bar and expanded selling space,” he said in the call. “We’ve added an app box for messages and advertisements right in the app. A few months ago, we opened an optical digital store where you can try on glasses virtually and then order them for pickup, prescription glasses.

“And lastly, there are ongoing improvements in our Costco app offering in-warehouse shopping tools to our customers, such as a Digital Membership Card, managing shopping lists, viewing warehouse savings, and seeing gas prices if there’s a gas station there,” he added. “Soon, you’ll be able to search warehouse inventory and scan barcodes from the app.”

In turn, Costco’s App Store rating has climbed from 2.3 stars to 4.7 stars over the past year, according to Galanti. “Unique visitors on the site are up 40% year over year, and the Costco app installs are up 46% year over year,” he said.

Related:Costco aims to thwart non-member card users at self-checkout

Groceries, traffic growth aid comparable sales

Costco’s total comparable sales in the fourth quarter rose 1.1% year over year and were up 3.8% excluding fuel price and FX rate changes. In the United States, comp sales inched up just 0.2% for the quarter but gained 3.1% backing out gas and FX.

Solid grocery sales in the quarter reflected Costco’s recent monthly sales results.

“Overall for the fiscal fourth quarter, food and sundries were relatively strong once again, with fresh foods right behind and with offsets on some of the nonfood categories,” Galanti told analysts.

Q4 also got a lift from a steady increase in club traffic that has continued throughout the fiscal year.

“In terms of Q4 comp-sales metrics, traffic or shopper frequency increased 5.2% worldwide and 5.0% in the United States,” said Galanti. “Our average transaction or ticket was down 3.9% worldwide and down 4.5% in the U.S., impacted in large part from weakness in bigger-ticket nonfood discretionary items as well as the gas price deflation. Foreign currencies relative to U.S. dollar negatively impacted sales by approximately 0.3%, and gasoline price deflation negatively impacted sales by approximately 2.5%.”

Costco has seen a consistent rise in club traffic since the first quarter of fiscal 2023. / Photo: Shutterstock

Fiscal 2023 comp sales grew 3% overall ( 5.2% adjusted), including a gain of 3.3%( 4.2% adjusted) in the U.S. That came atop comp-sales growth of 14.4% ( 10.6% adjusted) overall and 15.8% ( 10.4% adjusted) in the U.S. for fiscal 2022.

“Demand for discretionary, generally higher-ticket nonfood categories, declined by 5% year-over-year in the fourth quarter, a sequential improvement from a 15% to 20% decline earlier in the year. While discretionary demand remains soft, the company has started to see pockets of strength in the category, namely 30% growth in appliances, with a unit inflection in gaming, tablets, audio and TVs,” William Blair & Co. analyst Phillip Blee wrote in a research note on Wednesday. “In addition, units per transaction slightly increased as the company strategically added around 50 smaller-ticket ‘impulse’ items to its assortment. Demand for necessities remains healthy, with the greatest strength in food and sundries, followed by fresh foods.”

Membership fee hike coming—but when?

On earnings calls, analysts have regularly peppered Galanti with questions on whether Costco would soon raise its membership fees, but as usual he remained coy in his response. Back in March, in a call on Q2 results, he said June would mark the sixth year since Costco last raised its fee, and that the company’s last three fee increases averaged around five years and seven months apart.

“My pat answer, of course, is it’s a question of when, not if,” Galanti said in the Q4 call on Tuesday. “It’s a little longer this time around—since June of 2017, so we’re six years into it—but you'll see it happen at some point. We can’t really tell you if it’s in our plans or not. We’ll let you know when we know.”

According to CFRA Research analyst Arun Sundaram, a membership fee hike could come before the end of calendar 2023.

“The big catalyst for Costco still is a looming membership fee increase. We think it’s imminent, likely to happen before the end of the year,” Sundaram told CNBC on Tuesday. “Costco said that they’re waiting for inflation to moderate before it raises its fees. And now that inflation is moderating, we think a membership fee increase is imminent.”

Costco said its membership fee income climbed 13.7% year over year to $1.51 billion in the fourth quarter, including the extra week. That compared with a 7.5% gain in the year-ago period. For all of fiscal 2023, membership fee income was up 8.4% to $4.58 billion. U.S. and Canada renewal rates edged up 0.1% sequentially to 92.7% for Q4, while the worldwide rate fell by the same percentage to 90.4%.

“Membership growth continues. We ended the fourth quarter with 71 million paid household members, up 7.9% versus a year ago, and 127.9 million cardholders, up 7.6%. And that’s on new openings over the past year of just under a 3% increase in new locations,” Galanti said. “At the fourth-quarter’s end, we had 32.3 million paid executive memberships, an increase of 981,000 during the 17 weeks since Q3-end, and executive members now represent a little over 45% of our paid membership and approximately 73% of worldwide sales.”

Burst of new clubs set for Q1

Early 2024 will bring some busy brick-and-mortar activity as Costco maintains its club expansion pace.

“In the fourth quarter, we opened nine net-new warehouses, including five new buildings in the U.S., two in China, and one each in Japan and Australia. For the full fiscal 2023 year, we finished with 23 net-new units as well as we did three relocations,” Galanti said.

The 2022 fiscal year saw Costco open 26 net-new clubs—including three relocations and 14 net-new clubs in the U.S.—following 22 net-new stores (including two relocations) in 2021.

“For the first quarter, the first 12 weeks of fiscal 2024, we plan on opening 10 net-new units and as well relocating one unit. Nine are in the U.S. and one is in Canada,” according to Galanti.

Costco finished fiscal 2023 with 861 wholesale clubs overall, compared with 838 a year earlier. That includes 591 clubs in the U.S. and Puerto Rico.