Costco on Thursday reported choppy quarterly results, with a small top-line loss offset by strong profitability for better earnings. The report didn't blow us away, but it still provides plenty of reminders about why Costco investors should stay put. Total revenue in the fourth quarter of fiscal 2024 was $79.7 billion, missing analysts' expectations of $79.97 billion, according to estimates compiled by LSEG. Sales rose 1% year-over-year, although the year-ago quarter saw an extra week, skewing the comparison. Earnings per share over the 16-week period were $5.29, beating analysts' expectations of $5.08, LSEG data showed. The earnings result includes a one-time tax benefit of 14 cents per share. But even after removing it, the final results were still better than expected. 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. Competitors: BJ's Wholesale, Walmart and Clubmates that own Amazon Last purchased: June 15, 2020 Start date: January 27, 2020 Costco shares fell in extended trading Thursday by about 1.4%, to about $889 each, adding to modest losses during the regular session. The stock — one of the best performing stocks this year, up nearly 37% — closed at a record high of $917.08 a share on Monday. Bottom line There's nothing to worry about Costco's fourth-quarter results, even though sales were short. This failure was marginal and was offset by strong year-on-year expansion in both gross margin and operating margin levels, which enabled earnings. When normalizing for the additional week in last year's fourth quarter and removing the tax-related benefits mentioned above, adjusted EPS rose 12.6% year over year. Membership fee income of $1.5 billion was a bit small, but keep in mind that the latest fee increase — announced in July and implemented on September 1 — was not factored into Thursday's results. Its impact on Costco's currently ongoing 2025 fiscal year is certain to be “minimal” early on, as CFO Gary Millership noted on the call. “The vast majority of the benefits will come in the back half of fiscal year 2025 and into fiscal year 2026.” We left the earnings call with growing conviction that Costco remains the top destination for anyone looking to get the most for their money — and these days, who isn't? Costco stays true to its mission and finds new ways to reduce its costs. The company then passes these cost savings on to its members, trying to lower prices whenever possible and keep them constant. If Costco's suppliers are expected to try to lower prices when they can, we'll start by setting that example and showing the benefits of investing in price and increasing unit volume, said Costco CEO Ron Vacres. So, we do it. . “But we are also seeing great support from our suppliers and partners around the world who are also interested in driving their business and using Costco as a partner to get it done.” Member demographics were a bright spot on the call. About half of the new members in fiscal 2024 were under 40, said Millership, the CFO. “This percentage has been increasing since COVID-19 and has reduced the average lifespan of our members over the past few years.” The younger Costco can pick up a new member, the better chance it has of maintaining that member's loyalty over time. Cost Year-to-Date Mountain Costco stock performance year-to-date. Costco stock isn't cheap — a fact that prompted recent analyst downgrades — but we still see more upside ahead. The reason is simple: Consumers will continue to flock to Costco in search of value, and investors, in turn, will continue to reward management's ability to increase customer loyalty through its price-to-earnings multiple. Additionally, the benefit of the slightly higher membership fees has not trickled down to the business yet. Putting it all together, we're increasing our price target for the stock to $950 per share from $875. We are maintaining our rating of 2 on the stock for now, which means we will wait for pullbacks before purchasing additional shares. Quarterly Comment Costco's fourth-quarter gross margins of 11% beat Wall Street estimates of 10.94%, up 39 basis points on a reported basis and 33 basis points when excluding gas inflation. Both numbers are worth highlighting, but the former gas number offers a better look at Costco's underlying fundamentals given that the price of oil is outside of management's control. A basis point equals 0.01%. Core merchandise was a five basis point headwind to Costco's gross margins on a reported basis, while the 2% rewards program for certain members was a four basis point headwind. However, that was offset by a 44 basis point improvement in Costco's ancillary and other businesses — including gas stations, pharmacies, food courts, travel centers and hearing aids. Finally, inventory accounting last (LIFO) was a tailwind of five basis points. Adjusted store sales growth of 6.9% beat expectations, with the increase in traffic only partially offset by a slight decline in average ticket price. Supply chain was a topic of conversation during the call, with the administration noting that the Red Sea remains a vulnerability (remember, shipping containers in that region have had to deal with attacks by Houthi rebels from Yemen). While any further disruptions could increase ocean freight rates in the future, employees have done a very good job of insulating the company from recent rate increases with “good, strong contracts for this year.” Moreover, executives said spot rates — what they would pay if they signed contracts now — appear to have peaked and are starting to fall. The current inflation dynamic is similar to what we saw last quarter, according to management. The slight increase in the prices of food and miscellaneous items was offset by a decrease in the prices of non-food items, bringing the overall inflation rate down to almost zero. Thursday marked Costco's first conference call since the long-awaited membership fee increase became a reality. Although it is too early to determine the impact, we still expect little resistance from members due to the amazing value Costco provides. This is especially true when it comes to the Kirkland Signature brand, which continues to grow faster than the business as a whole. Millerchip pointed to several examples of Kirkland Signature products that saw price declines during the quarter, such as macadamia nuts, a three-liter bottle of Spanish olive oil, and a two-pack baguette. In addition, the CFO said Costco's “commitment to sustainability” has led to the redesign of some product packaging that uses less plastic, giving the team an opportunity to lower prices. Laundry packs are one example of this happening, with prices up to $18.99 from $19.99, Millership said. In other words, not only are we seeing inflation decline at Costco, as the rate at which prices rise is slowing, we are actually seeing several examples of deflation, which means prices are actually falling. This quarter, Costco's membership renewal rate in the U.S. and Canada reached 92.9%, significantly lower than the 93% rate observed in the fiscal third quarter, while remaining steady worldwide at 90.5%. Millership attributed the slight declines in membership renewals in the US and Canada to a short-lived online membership promotion in 2023 that resulted in 200,000 new sign-ups at the time. “When these members entered the renewal rate calculation during the fourth quarter of fiscal year 2024, the lower renewal rate for this group, which is typical for digital promotions, had a negative impact on the overall renewal rate in the U.S. Beyond those signups, there were no changes Meaningful renewal rate in the United States.” Costco's warehouse expansion created 29 net new locations in fiscal 2024, including the opening of its first location in Maine, bringing the company's U.S. presence to 47 states. Management expects to add another 26 net new builds in fiscal year 2025, with 12 of those locations located outside the U.S. (Jim Cramer's Charitable Trust is long-cost. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will You receive a trade alert before Jim takes the 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 walk past the membership counter at a Costco store on July 11, 2024 in Richmond, California.
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Costco On Thursday it reported choppy quarterly results, with a slight miss on the top line offset by strong profitability for better earnings. The report didn't blow us away, but it still provides plenty of reminders about why Costco investors should stay put.