Wholesale retailer Costco Wholesale (COST) reported strong profits for its second quarter of fiscal 2023 on Thursday, even as signs of weakening sales dragged shares down after hours. But the results don’t change the Club’s view that Costco is still the best-run retailer in the United States. Revenue for the three months ended Feb. 12 rose 6.5% year-over-year to $55.27 billion, missing analysts’ expectations for $55.54. billion, according to estimates compiled by Refinitiv. Earnings per share (EPS) rose 13% year-over-year to $3.30, ahead of analysts’ forecast for EPS of $3.21 per share, according to Refinitiv data. . Costco shares fell about 3% in after-hours trading to around $471 apiece. Still, the new year has been more favorable for this defensive name in retail compared to other big box stores like Walmart (WMT). After factoring in tonight’s decline, Costco shares have gained about 3.3% year-to-date, versus a 3.7% increase for the S&P 500. Unsurprisingly, Costco has posted a flat quarter on Thursday, a result of management’s ability to execute in a challenging retail environment. While it’s positive to see Costco’s margins increase from last year, it’s also important to note that management isn’t running the business for profit margins. Costco is a volume-based, members-only business that prides itself on being the first retailer to lower prices and the last to raise them. This customer-centric philosophy has never failed. The approach should continue to generate market share gains and generate reliable earnings streams for the foreseeable future, even in difficult macroeconomic conditions. As shares slid in late trading, the stock has a history of trading lower in earnings reports as the company’s monthly sales figures price in significant upside potential. A comparable slowdown in sales in February and the stock’s valuation keep us at a 2 rating for now, but Costco remains a defensive stock that we want to hold in the portfolio for the long term. Quarterly Commentary Given that sales figures are released on a monthly basis, the biggest question for the company when it comes to quarterly results – and really for all retailers in this inflationary environment – is how gross margins behaved. Costco’s gross margins, excluding membership fees (which directly impact earnings), were a welcome surprise, rising eight basis points from a year ago to 10.72%. And without gasoline inflation, gross margins would have increased by nine basis points. During the post-earnings conference call with analysts and investors, Costco management broke down all the drivers of quarterly margin performance. Commodities were a six basis point drag both on a reported basis and excluding gas inflation. Margins continued to tighten in the retail portion of the business, with most major departments down last year, especially fresh food. Despite inflation pushing prices higher, Costco has remained committed to maintaining or lowering prices where possible in order to beat its competitors. Costco’s ancillary businesses — including gas stations, pharmacies, food courts, travel centers and hearing aid centers — provided a two-basis-point tailwind on a reported basis, but a increase of three basis points excluding gas inflation. Costco’s lower gas prices, coupled with strong consumer demand for travel, helped these businesses pace the quarter, although they were partially offset by e-commerce and pharmacy. Costco’s 2% reward program was a two basis point headwind on both sides due to increased sales from Costco’s executive members. And last-in-first-out (LIFO) inventory accounting was a 14 basis point advantage because, unlike last year, the company didn’t have to pay a $71 million inventory charge. dollars. Taken together, Costco saw an eight basis point improvement on a reported basis, primarily due to the absence of LIFO fees. Inflation has started to come down especially for Costco, with the company now seeing year-over-year price increases in the 5% to 6% range and even a little lower towards the end of the quarter. In August, Costco was experiencing annual inflation closer to 8%. One of the ways management can improve their margins in the future is to increase their contributions. It’s something the company has traditionally done every five years and seven months, and we’re right around the anniversary. These potential gains would not directly impact the bottom line, as management would want to invest those extra dollars to keep prices down, but any increase would help overall business performance. Management has given no indication that a fee hike is imminent, but chief financial officer Richard Galanti reiterated on Thursday that “it’s a matter of when, not if.” The company is still hesitant to raise prices for its members during this time of high inflation, even though increased churn is probably the last thing they need to worry about. Costco just ended the quarter with renewal rates at record highs. Meanwhile, Costco has paid a dividend four times in the past eight years, most recently in November 2020. Management has hinted in the past that another might be on the horizon, but has made no concrete comment on Wednesday. February Sales Alongside its fiscal second quarter results on Wednesday, Costco provided comparable sales for the four-week period ended Feb. 26. The numbers point to some weakness in the business, with adjusted comparable sales (excluding currency and gas headwinds) rising 3.5% in the US, this figure is well below analysts’ estimates of a gain of 5.3% and was significantly lower than the 6.9% growth seen in January. In total, same-store sales rose 3.5%, missing estimates by 4.7% and decelerating from January’s 7.4% gain. Food and sundries continued to be a source of strength, while non-food categories fell mid-single digits. This trend is a continuation of what we have seen in the post-Covid world, where consumers have continued to buy essentials like food despite inflation, while general merchandise sales have been more low, in part because the pandemic has pushed up a lot of demand. (Jim Cramer’s Charitable Trust is long COST. See here for a full stock list.) As a CNBC Investing Club subscriber with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. 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Shoppers wearing face masks leave a Costco wholesale store in Washington, DC
ting shen | Xinhua News Agency | Getty Images
Wholesale retailer Wholesale Costco (COST) posted strong profits for its second quarter of fiscal 2023 on Thursday, even as signs of weakening sales pushed the stock lower in after-hours trading. But the results don’t change the club’s view that Costco is still the best-run retailer in the United States.