Costco Wholesale sees slowing sales momentum in Q3

Sales growth continued to slow at Costco Wholesale in the fiscal 2023 third quarter, as the warehouse club chain tallied smaller net and comparable sales gains.

At the bottom line, Issaquah, Washington-based Costco posted a decline in net income but turned in adjusted earnings per share within Wall Street's forecast range for the quarter.

Net sales for the 12-week quarter ended May 7 totaled $52.6 billion, edging up 1.9% from $51.61 billion a year earlier, Costco reported Thursday after the market close. That compared with annual increases of 6.5% for the fiscal 2023 second quarter and 8.1% for the first quarter. The prior-year net sales gain was 16.3%.

Overall comparable sales inched up 0.3% year over year (3.5% excluding fuel and foreign exchange) for the 2023 third quarter, following gains of 14.9% (10.8% excluding fuel and FX) a year ago and 5.2% (6.8% excluding fuel and FX) in Q2 and 6.6% (7.1% excluding fuel and FX) in Q1 of the current fiscal year.

By business unit, Costco saw fiscal 2023 Q3 comp sales dip 0.1% in the United States ( 1.8% adjusted) and decline 1% in Canada ( 7.4% adjusted) but rise 4.1% internationally ( 8.4% adjusted). U.S. comp sales climbed by 16.6% in fiscal 2022 Q3 and were up 9.3% and 5.7%, respectively, in Q1 and Q2 of fiscal 2023.

Online sales decreased for the third straight quarter, down 10% (-9% adjusted) for Q3 2023. That came after year-over-year downticks of 9.6% (-8.7% adjusted) in the second quarter and 3.7% decrease (-2% adjusted) in the first quarter, according to Costco. E-commerce sales had risen 7.4% ( 7.9% adjusted) for Q3 2022.

On the earnings front, Costco posted fiscal 2023 second-quarter net income (attributable to Costco) of $1.3 billion, or $2.93 per diluted share, compared with $1.35 billion, or $3.04 per diluted share, in the 2022 quarter.

Costco noted that the 2023 Q3 earnings result reflects a non-recurring charge (pretax) to merchandise costs of $298 million, or 50 cents per diluted share, namely for the discontinuation of charter shipping activities.

Analysts, on average, had projected Costco’s Q3 adjusted EPS at $3.29, with projections ranging from a low of $3.04 to a high of $3.47, according to Refinitiv.

“While Costco’s comps, net sales and SG&A missed Street expectations, Costco’s 3Q retail gross margin helped drive an EPS beat of $3.43 (excluding non-recurring items) versus consensus of $3.29,” Jefferies analyst Corey Tarlowe wrote in a research note on Thursday. “Sales were weaker due to FX and gas headwinds, and e-commerce weakness continued from April sales (down 10% year over year). That said, we still believe Costco is well-positioned to gain a share in this current macro environment due to its value offering.”

Currently, Costco operates 853 warehouse clubs overall, compared with 830 a year ago. By market, the retailer has 587 clubs in the U.S. and Puerto Rico, 107 in Canada, 40 in Mexico, 32 in Japan, 29 in the United Kingdom, 18 in Korea, 14 in Taiwan, 14 in Australia, four in Spain, three in China, two in France, and one apiece 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.