Costco Wholesale's third-quarter earnings beat Wall Street expectations Thursday, driven by higher sales and lower-than-expected operating expenses. Even with its recent shift to the C-Suite, Costco delivered a business-as-usual quarter, as members flocked to its warehouses in search of quality merchandise at value prices. Total revenue in the third quarter of fiscal 2024 rose 9.1% year over year to $58.52 billion, beating analysts' expectations of $58.07 billion, according to estimates compiled by LSEG. Earnings per share in the three months ended May 12 were $3.78, beating analysts' expectations of $3.70, LSEG data showed. Year over year, Costco's profits rose 29%. After closing at a record high of $815.34 a share on Thursday, Costco stock fell about 1.5% in extended trading. We pin the slight pullback on the stock's historical trading pattern to take profits immediately after earnings. The stock is up 23.5% year to date during Thursday's regular session. Costco Wholesale Why we own it: Costco is the best-run retailer in the world, with a business model focused on offering its members a relatively small selection of products at prices that are hard to beat. Costco has been successful for decades, but high inflation in recent years has made the company's value-focused ethos really shine. A potential rise in membership fees is one catalyst still looming for the stock. Competitors: BJ's Wholesale, Walmart, and Clubmates who own Amazon Last Purchased: June 15, 2020 Start Date: January 27, 2020 Bottom Line Costco delivered a quality quarter with not much to choose from. The company continues to achieve impressive sales growth for a company of its size – a sign of market share gains in a volatile retail environment. Additionally, it was great to hear from both new CEO Ron Vacres and CFO Gary Millership about what they see as areas of opportunity, such as investing in technology; Online orders for in-store pickup; Retail media monetization, a term used to describe the advertising business of retailers. Fatkris took over the top job in January. Millership became CFO in mid-March. To be sure, Costco did not announce a membership fee increase on Thursday, and the stock may be affected by that. This has proven to be a much more elusive incentive than the special cash dividend that arrived a few quarters ago. But Costco operates at such a high level and is so competitively priced that it doesn't need to raise fees yet. There may have been some speculation that Costco would announce a stock split because that's back in fashion on Wall Street, but the quiet here doesn't change the thesis. Instead, we still see Costco having a company that will grow its profits and reinvest those profits back into the business to gain more market share and grow its footprint around the world. As a result, we increased our price target to $875 per share from $800, but maintain our rating of 2, meaning we continue to view pullbacks as a buying opportunity. Quarterly Commentary Costco's fiscal third-quarter gross margins of 10.84% beat Wall Street estimates slightly, but increased by 52 basis points on a reported basis and 54 basis points excluding gas inflation. We highlight both the ex-gas and reported numbers because the ex-gas number provides a better window into the underlying fundamentals. The price of oil is not something that management can control. Core goods were flat on a reported basis, but improved by 2 basis points when excluding the impact of gasoline. Costco saw small headwinds from fresh food sales – part of a deliberate strategy to provide value – and a small positive contribution from non-food items. Meanwhile, margins were flat in the food and miscellaneous category, which includes frozen foods and so-called dry grocery items such as pasta. Costco's ancillary and other businesses — including gas stations, pharmacies, food courts, travel centers and hearing aids — represent a six basis point headwind to margin on a reported basis and a five basis point tailwind. Costco's 2% bonus program was a 1 basis point headwind to margins on both a reported basis and when excluding gas, as a result of more sales to Costco's executive members. Last-in, first-out (LIFO) inventory accounting has been a benefit with two fundamental points on both sides. This is due to a LIFO balance of $11 million in the quarter, compared to no fees in the same period last year. Costco's reporting segment for so-called “other” items saw a benefit of 57 basis points on a reporting basis and an ex-gas benefit of 56 basis points. This was due to last year's results including one-time merchandise cost charges of $298 million, primarily due to the cessation of Costco's charter shipping activities. Cost.SPX 5Y Costco stock's five-year performance compared to the S&P 500. Costco's inflation update remained encouraging. The company cited similar trends from the previous quarter, where inflation in all staples was essentially flat and fresh foods near zero. Meanwhile, slight inflation in food and miscellaneous items is offset by some contraction in non-food items, particularly appliances, sporting goods and furniture. It has long been assumed on Wall Street that once Costco sees merchandise inflation stabilize at zero, it will eventually increase its membership fees. To the disappointment of investors, it looks like we will have to keep waiting. On a call Thursday, Millership CFO echoed his predecessor Richard Galanti's comments, saying the company was waiting for the “right time” to raise its membership fees. Costco has historically done this every 5.5 years, which, based on this timeline, puts the company about two years behind. Membership fees are a pivotal point because raising them would provide two distinct benefits. Some of those extra dollars will flow directly to your bottom line, meaning higher profits. But most of that money will likely be reinvested back into the business to keep prices low, which in turn will increase sales volume and improve Costco's cost leadership among retail competitors. Always remember that Costco is a volume company, not a margin company. When Costco eventually decides to increase its membership fees, we expect it will meet little resistance from its members. The renewal rate in the US and Canada rose again to 93% while the renewal rate worldwide remained steady at 90.5%. This year's Costco warehouse expansion continues according to plan. The company estimates a net 28 new locations this fiscal year. In the long term, Millership said he believes 25 to 30 new warehouses a year is a “reasonable alternative.” (Jim Cramer's Charitable Trust is Long COST and AMZN. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you'll receive a trade alert before Jim takes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charitable fund's portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. The above Investment Club information is subject to our Terms and Conditions and Privacy Policy, as well as our Disclaimer. No obligation or fiduciary duty exists or is created by your receipt of any information provided in connection with the Investment Club. No specific results or profits are guaranteed.
Customers using the Costco self-service check-out area, Queens, New York.
UCG | Global Photo Collection | Getty Images
Costco wholesaleThird-quarter earnings beat Wall Street expectations on Thursday, driven by higher sales and lower-than-expected operating expenses. Even with its recent shift to the C-Suite, Costco delivered a business-as-usual quarter, as members flocked to its warehouses in search of quality merchandise at value prices.
