Investment research report for COST

Table of Contents

Executive Summary
Valuation Analysis
Industry and Competitors Analysis
Financial Analysis
Earnings Call Multi-Year Analysis
Financial Statements Multi Year
Insider Trading Analysis
Management Compensation Benchmark Analysis
Proxy Statement Analysis
News Analysis
Technical Indicators Analysis
Financial Statements Annual
Financial Statements Quarterly
Earnings Call Analysis

Executive Summary

Company Description

Costco Wholesale Corporation (COST) is a leading membership-only warehouse club that provides a wide range of merchandise at discounted prices. The company operates an international chain of warehouses and offers a diverse selection of products, including groceries, household items, appliances, and more. Costco’s business model is centered around its membership program, which generates recurring revenue and fosters customer loyalty.

Financial Strength and Growth Potential

Costco has demonstrated consistent financial strength, with robust revenue growth, healthy profitability, and strong cash flow generation. The company’s membership base continues to expand, with high renewal rates indicating strong customer loyalty. Costco’s expansion into new markets, both domestically and internationally, coupled with its investments in e-commerce and logistics capabilities, position it well for future growth.

Competitive Advantage and Quality of Management

Costco’s competitive advantage lies in its membership-based business model, focus on low prices, and efficient operations. The company’s strong brand recognition and customer loyalty contribute to its competitive edge. Costco’s management team has consistently delivered solid financial performance, strategic decision-making, and a commitment to long-term sustainability, demonstrating effective leadership.

Shareholder Friendliness and Valuation

Costco has a history of returning value to shareholders through regular dividends and share repurchases. While the company’s valuation may appear elevated based on traditional metrics, its growth potential, efficient operations, and shareholder-friendly policies could justify a premium valuation. However, investors should carefully consider the risks and potential challenges in the retail sector when evaluating Costco as an investment opportunity.

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Valuation Analysis

PE Ratio

The PE ratio for the company COST is as follows:
– Low: 28.618749366207297
– Base: 35.25314460070229
– High: 41.88753983519729

PB Ratio

The PB ratio for the company COST is as follows:
– Low: 6.105380517786546
– Base: 8.731034326048595
– High: 11.356688134310645

EPS Growth

The EPS Growth for the company COST is as follows:
– Low: 12.33%
– Med: 13.33%
– High: 14.25%

Unable to provide price targets since this company’s financials are highly unstable. We recommend not to hold this stock in your portfolio.

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Industry and Competitors Analysis

Costco’s Industry and Competitors

Based on the information provided, COST (Costco Wholesale Corporation) operates in the discount stores industry, which includes retailers that offer a wide range of merchandise at discounted prices. Some of COST’s major competitors in this industry are:

Walmart (WMT)

Walmart is the largest company in the discount stores industry and a major competitor to Costco. It operates supercenters, discount stores, and warehouse clubs (Sam’s Club) across the United States and internationally.

Dollar Tree (DLTR)

Dollar Tree operates discount variety retail stores under the Dollar Tree and Family Dollar brands, offering merchandise at fixed prices.

BJ’s Wholesale Club (BJ)

BJ’s is a membership-only warehouse club chain that operates on the east coast of the United States, similar to Costco’s business model.

Big Lots (BIG)

Big Lots is a discount retailer that offers a wide range of merchandise, including furniture, seasonal items, consumables, and home products.

Target (TGT)

While not a pure discount store, Target is a major general merchandise retailer that competes with Costco in various product categories.

Dollar General (DG)

Dollar General is a discount retailer that primarily focuses on consumable products and operates smaller-format stores across the United States.

In terms of competitive positioning, Costco appears to be a leader in the warehouse club segment, with a strong focus on membership-based retail and offering a wide range of products at discounted prices. Its financial metrics, such as revenue growth, profitability ratios, and balance sheet strength, suggest a solid competitive position in the industry. However, it faces intense competition from larger retailers like Walmart and Target, as well as other discount and warehouse club chains.

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Financial Analysis

Financial Strength:

Costco has maintained a relatively strong return on equity (ROE) over the years, averaging around 6-8%, indicating efficient use of shareholders’ equity to generate profits. The company has a healthy current ratio, typically above 1, suggesting it can meet its short-term obligations. Costco’s debt-to-equity ratio has been increasing over time but remains manageable, indicating a moderate level of financial leverage.

Potential for Growth:

Revenue growth has been positive in most quarters, with some fluctuations due to the pandemic’s impact. Analyst estimates project revenue growth to continue, with estimated revenue reaching around $330 billion by 2028. The company has been expanding its store count and online presence, providing opportunities for further growth.

Competitive Advantage:

Costco’s membership-based business model and focus on low prices provide a competitive advantage in the retail industry. The company’s strong brand recognition and customer loyalty contribute to its competitive edge. Efficient operations and supply chain management help Costco maintain low costs and pass on savings to customers.

Quality of Management:

Consistent profitability and revenue growth over the years suggest effective management practices. The company’s expansion into new markets and online channels demonstrates strategic decision-making by management. Costco’s focus on customer satisfaction and employee welfare indicates a commitment to long-term sustainability.

Shareholder Friendliness:

Costco has a history of paying dividends, although the dividend yield is relatively low compared to some other retailers. The company has been consistently repurchasing shares, returning value to shareholders. Analyst estimates project earnings per share (EPS) growth, which could translate into higher returns for shareholders.

Valuation:

Costco’s price-to-earnings (P/E) ratio has been relatively high compared to historical levels, suggesting that the stock may be overvalued based on current earnings. However, the company’s strong competitive position, growth potential, and efficient operations may justify a premium valuation. Analysts’ EPS estimates for future years could support the current valuation if Costco meets or exceeds those projections.

Overall, Costco appears to be a financially strong company with a competitive advantage in the retail industry. While its valuation may seem high, the company’s growth potential, efficient operations, and shareholder-friendly policies could justify the premium. However, investors should carefully consider the risks and potential challenges in the retail sector when evaluating Costco as an investment opportunity.

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Earnings Call Multi-Year Analysis

Relentless Focus on Sales Growth and Market Share

Costco maintains a relentless focus on driving sales growth and market share gains, even if it means accepting some near-term margin pressure. The company is willing to invest in lower prices to provide value to members and remain highly competitive.

Exceptional Membership Metrics

Membership metrics like renewal rates and executive member penetration remain exceptionally strong, indicating high customer loyalty and engagement. This provides a stable, recurring revenue stream.

Costco is effectively navigating inflationary pressures and supply chain challenges by working closely with suppliers, leveraging its scale, and finding operational efficiencies. The company has pricing power and can selectively pass on some cost increases.

Enhancing E-commerce and Omnichannel Experience

The company continues to invest in enhancing its e-commerce capabilities, logistics networks (e.g., Costco Logistics), and omnichannel experience, though physical warehouses remain the core focus.

International Expansion Opportunities

International expansion, while measured, remains a long-term growth opportunity as Costco aims to increase its global footprint gradually.

Disciplined Approach to Growth

Costco takes a disciplined approach to growth, carefully managing new warehouse openings, inventory levels, and capital expenditures to maintain operational efficiency and profitability.

Commitment to Value Proposition and Service Levels

The company is willing to absorb higher costs in areas like wages and employee benefits to maintain its value proposition and high service levels.

Cautious Approach to Membership Fee Increases

Costco remains cautious about raising membership fees, preferring to time any increases based on the overall economic environment and competitive landscape.

In summary, Costco’s consistent execution, strong membership model, and commitment to providing value position the company well for long-term growth, despite near-term economic pressures. The long-term investor should focus on Costco’s ability to drive market share gains, maintain high membership loyalty, and leverage its operational advantages.

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Financial Statements Multi Year

Revenue Growth

Costco consistently delivers strong revenue growth driven by increases in comparable sales, new warehouse openings, and growth in membership fees from new signups and renewals. This demonstrates the strength of Costco’s business model.

Profitability and Margins

Costco maintains healthy profitability by managing costs efficiently and leveraging its scale. While gross margins can fluctuate due to factors like inflation, the company has shown the ability to offset pressures through pricing and cost management strategies.

Costco’s membership base continues to grow, with high renewal rates indicating strong customer loyalty. This is a key driver of the company’s success and a competitive advantage.

Expansion and Investment

Costco actively invests in expanding its warehouse network, both domestically and internationally, positioning it for future growth. The company also invests in technology and infrastructure to support its operations.

Strong Cash Flow and Financial Position

Costco generates robust operating cash flow and maintains a solid cash position, providing financial flexibility for investments, expansion, and returning capital to shareholders.

Shareholder-Friendly Capital Allocation

Costco consistently returns capital to shareholders through regular and special dividends, as well as share repurchases, demonstrating its commitment to shareholder value creation.

Risk Factors

While Costco’s business model is resilient, the company faces risks from inflationary pressures, legal and regulatory issues, and potential disruptions to its operations or supply chain.

Overall, Costco’s financial statements highlight its consistent performance, efficient operations, strong cash flow generation, and disciplined capital allocation, making it an attractive long-term investment opportunity for investors seeking exposure to the retail sector.

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Insider Trading Analysis

Long-Term Patterns

The CEO (W. Craig Jelinek) and CFO (Richard Galanti) have been consistently active in insider trading over the long-term, with multiple transactions each year. Other key executives like James Klauer, Patrick Callans, and Daniel Hines have also been regularly engaged in insider trading. There is a pattern of executives receiving stock awards/grants and then later selling portions of those shares.

Recent Patterns

In 2024 so far, the CEO has conducted several large “in-kind” transactions, transferring over 30,000 shares in multiple transactions. The CFO has also been active, conducting both sales and gifts of shares in 2024. Other executives like Callans, Klauer, and Hines have also had multiple transactions in 2024, including sales, awards, and in-kind transfers.

Implications

The consistent and sizable insider trading activity by the CEO, CFO, and other key executives suggests they have confidence in the long-term prospects of the company. However, the frequency of share sales, especially by the CEO, may raise some concerns for long-term investors about management’s commitment to the company. Short-term investors may view the insider trading as a positive signal, but should monitor for any significant changes in trading patterns that could indicate a shift in management’s outlook.

Overall, the data points to active and ongoing insider trading by Costco’s leadership, which long-term investors should carefully evaluate as part of their assessment of the company’s future.

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Management Compensation Benchmark Analysis

Alignment with Shareholder Value

The executive compensation structure at COST appears to be well-aligned with creating long-term shareholder value. A significant portion of the total compensation for the top executives is in the form of stock awards, which incentivizes them to focus on the company’s long-term performance and growth.

Balanced Compensation Mix

The base salary portion of the total compensation for COST executives is relatively low, ranging from around 10-25% on average. This suggests that a majority of the compensation is tied to variable, performance-based components like stock awards and incentive plan compensation.

Consistency over Time

The compensation structure and mix has remained relatively consistent over the years, indicating a stable and well-designed executive compensation program at COST.

Benchmarking against Peers

Compared to other retail companies like Walmart (WMT) and Dollar General (DG), the base salary portion of total compensation for COST executives is lower, suggesting a stronger emphasis on performance-based pay.

Long-Term Orientation

The significant weighting of stock awards in the total compensation package aligns the interests of COST executives with those of long-term shareholders, incentivizing them to focus on the company’s sustained growth and profitability.

Overall, the executive compensation structure at COST appears to be well-designed to incentivize the leadership team to create long-term shareholder value, which should be a positive signal for long-term investors in the company.

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Proxy Statement Analysis

Climate Action Plan and Net-Zero Carbon Emissions Goal

The following analysis is based on the latest proxy statement of COST. Based on the information provided in the document, there does not appear to be any direct discussion about executive compensation or how it aligns with creating long-term shareholder value at Costco. The document focuses on analyzing Costco’s climate action plan and its goal of achieving net-zero carbon emissions by 2050.

The key insights from the document that may be relevant for a long-term investor are:

  1. The report questions the technological and economic feasibility of Costco achieving its net-zero carbon goal by 2050, and whether the underlying climate models are accurate.

  2. It raises concerns about the potential economic consequences of adopting such aggressive climate goals, especially if other countries and the U.S. government do not mandate similar decarbonization efforts.

  3. The report suggests that Costco’s board may be prioritizing an ideological view of climate action over broader stakeholder interests, such as the impact on the fossil fuel industry and its employees.

  4. The report argues for more transparency and further analysis from Costco, as requested in the shareholder proposal, to allow long-term investors to assess the appropriateness and feasibility of the company’s climate goals.

While the document does not directly address executive compensation, it highlights key factors related to Costco’s climate strategy that a long-term investor would want to understand to evaluate the alignment of incentives with long-term value creation.

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News Analysis for Costco Wholesale Corporation

Positives

Based on the recent news coverage, Costco (COST) stock has several positive factors that may be of interest to long-term investors:

  • Strong membership renewal rates (92.7% in Q4 2023) and growing membership base, indicating customer loyalty and recurring revenue stream.
  • Robust comparable sales growth, driven by higher traffic and spending per customer, despite inflationary pressures.
  • Expansion into healthcare services through partnerships, offering additional revenue streams.
  • Continued focus on expanding physical footprint and e-commerce capabilities.
  • Potential for a special dividend payout, rewarding shareholders.
  • Viewed as a defensive stock that can withstand economic downturns.

Concerns

However, there are also some concerns that long-term investors should consider:

  • High valuation multiples compared to peers, leaving less room for further multiple expansion.
  • Slowing sales growth and margin pressures due to intense competition and promotional environment.
  • Potential membership fee hike, which could impact customer retention in the near term.
  • Supply chain disruptions and inflationary cost pressures impacting profitability.
  • E-commerce sales growth lagging behind physical stores.

Overall Assessment

Overall, Costco remains a high-quality company with a strong competitive position, loyal customer base, and growth opportunities. However, the premium valuation and potential near-term headwinds are risks that long-term investors should consider. Many analysts still view Costco as a solid long-term investment, given its resilient business model and ability to navigate economic cycles effectively.

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Technical Indicators Analysis

Next week trading

The recent TEMA (Triple Exponential Moving Average) trend is bullish, indicating a positive short-term momentum. The RSI (Relative Strength Index) is in the overbought territory, suggesting the stock may be due for a pullback in the near term. The SMA_20 (20-day Simple Moving Average) is above the SMA_50 and SMA_200, further confirming the bullish short-term trend. Based on this, a next week trader may consider taking a cautious approach, looking for potential pullbacks as entry points.

Resistance and Support Levels

The current price of COST is trading above the SMA_20, SMA_50, and SMA_200, indicating strong support levels. The recent high of around $873 could act as a resistance level in the short term. A break above this level could signal further upside potential.

Short Term Investor

The technical indicators suggest a bullish short-term trend for COST. The high RSI and overbought conditions may lead to a pullback in the near term, providing an opportunity for short-term investors to enter the stock at a more favorable price. The strong TEMA and the SMA_20 being above the SMA_50 and SMA_200 support the positive short-term outlook.

Long Term Investor

For a long-term investor, the overall technical picture appears favorable. The stock is trading above the SMA_50 and SMA_200, indicating a positive long-term trend. The rising TEMA and the RSI remaining in the bullish territory suggest that the long-term uptrend is likely to continue. Long-term investors may consider this as a good opportunity to establish or add to their positions in COST.

In summary, the technical indicators for COST suggest a bullish short-term and long-term outlook, with the potential for a near-term pullback. Next week traders may want to be cautious and look for entry points on potential dips, while short-term and long-term investors can consider the current levels as an attractive entry point.

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Chart of Valuation History

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Financial Statements Annual

Financial Statements Annual 2024 Q2

Strong and consistent revenue growth

Costco’s net sales increased 7% in 2023, driven by a 3% increase in comparable sales, sales from new warehouses opened in 2022 and 2023, and an additional week of sales in 2023. This demonstrates Costco’s ability to consistently grow its top-line.

Healthy profitability and margins

Costco’s gross margin percentage increased 9 basis points in 2023, driven by a smaller LIFO charge and improvements in the core merchandise categories. This indicates Costco’s ability to maintain strong profitability despite inflationary pressures.

Efficient operations and cost control

Selling, general and administrative (SG&A) expenses as a percentage of net sales increased only 20 basis points in 2023, despite higher wage costs, demonstrating Costco’s ability to control costs and leverage its scale.

Robust cash flow and financial position

Costco generated $11.1 billion in operating cash flow in 2023 and ended the year with $15.2 billion in cash and short-term investments, providing ample liquidity and financial flexibility.

Shareholder-friendly capital allocation

Costco returned $1.9 billion to shareholders in 2023 through dividends and share repurchases, and increased its quarterly dividend by 13%, underscoring its commitment to shareholder value creation.

Successful international expansion

Costco’s international operations, including Canada and other international markets, contributed 27% of net sales and 34% of operating income in 2023, highlighting the success of its global expansion strategy.

Costco’s member renewal rates remained high at 92.7% in the U.S. and Canada and 90.4% worldwide, demonstrating the loyalty of its membership base, a key driver of its business model.

Overall, Costco’s consistent financial performance, efficient operations, strong cash flow, and shareholder-friendly capital allocation make it an attractive long-term investment opportunity for investors.

Financial Statements Annual 2023 Q2

Strong and consistent revenue growth

Costco’s net sales increased 16% in 2022, driven by a 14% increase in comparable sales across the US, Canada, and International operations. This demonstrates Costco’s ability to consistently grow its core business.

Costco’s paid membership grew to 65.8 million, with a strong renewal rate of 93% in the US and Canada, and 90% globally. The growing membership base and high renewal rates indicate strong customer loyalty.

Profitability and margin management

While gross margin decreased 65 basis points, Costco was able to leverage increased sales to reduce SG&A expenses as a percentage of net sales by 77 basis points. This shows Costco’s ability to manage costs and maintain profitability.

Solid cash flow and financial position

Costco generated $7.4 billion in operating cash flow and ended the year with $11 billion in cash and short-term investments, providing ample liquidity and financial flexibility.

Disciplined capital allocation

Costco continues to invest in new warehouse openings, with 26 net new warehouses opened in 2022. The company also returned capital to shareholders through dividends and share repurchases, demonstrating a balanced approach to capital allocation.

Exposure to inflationary pressures

Costco’s merchandise costs were impacted by higher inflation, which the company has partially offset through pricing and cost management strategies. However, this remains a risk factor to monitor going forward.

Costco faces various legal proceedings and regulatory risks, particularly related to labor and employment matters in certain jurisdictions. While the company believes these risks are not material, they represent an ongoing area of focus and potential liability.

Overall, Costco’s financial statements demonstrate the company’s ability to drive consistent growth, maintain strong profitability, and generate substantial cash flow, positioning it well for long-term success despite the current macroeconomic challenges.

Financial Statements Annual 2022 Q2

Strong Revenue Growth

Costco’s net sales increased 18% in 2021 to $192,052 million, driven by a 16% increase in comparable sales and sales from new warehouses opened in 2020 and 2021.

Membership Fee Growth

Membership fee revenue increased 9% to $3,877 million, driven by signups and upgrades to Executive membership. Membership renewal rates remained high at 91% in the U.S. and Canada, and 89% worldwide.

Profitability Improvement

Net income increased 25% to $5,007 million, or $11.27 per diluted share, compared to $4,002 million, or $9.02 per diluted share in 2020. This was driven by the strong sales growth and improved operating leverage.

Expansion and Investment

Costco opened 22 new warehouses in 2021, including 2 relocations, and plans to open up to 35 additional new warehouses in 2022. The company also made substantial investments in capital expenditures of $3,588 million, primarily for new warehouses, depots, and information technology.

Liquidity and Cash Flow

Costco generated strong operating cash flow of $8,958 million in 2021. The company ended the year with $12,175 million in cash, cash equivalents, and short-term investments, providing ample liquidity.

Shareholder Returns

Costco paid a special cash dividend of $1,000 per share in December 2020 and increased its quarterly dividend from $0.70 to $0.79 per share in April 2021. The company also repurchased $495 million of its common stock in 2021.

Overall, Costco delivered excellent financial performance in 2021, with robust revenue growth, improved profitability, continued expansion, and strong cash flow generation. The company’s membership model, focus on value, and operational efficiency continue to drive its success.

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Financial Statements Quarterly

Financial Statements Quarterly 2024 Q2

Strong Revenue Growth

Costco’s net sales increased 9% in Q2 2024 compared to Q2 2023, driven by a 7% increase in comparable sales and sales from 24 net new warehouses opened since the end of Q3 2023.

Membership Fee Revenue Growth

Membership fee revenue increased 8% in Q2 2024 and the first 36 weeks of 2024, driven by new member signups and upgrades to Executive Membership. The company’s worldwide renewal rate was 905%.

Improved Gross Margin

Gross margin percentage increased 52 basis points in Q2 2024, primarily due to the absence of a charge related to the discontinuation of charter shipping activities in the prior year period. Excluding the impact of gasoline prices, gross margin percentage increased 54 basis points.

Efficient Cost Management

SG&A expenses as a percentage of net sales decreased 15 basis points in Q2 2024, primarily due to improved productivity in warehouse operations and other businesses.

Strong Cash Flow and Liquidity

Net cash provided by operating activities was $8.38 billion in the first 36 weeks of 2024, up from $7.34 billion in the same period of 2023. The company had $11.5 billion in cash, cash equivalents, and short-term investments at the end of Q2 2024.

Capital Allocation

Costco paid a special dividend of $1,500 per share in Q2 2024 and repurchased $484 million of common stock in the first 36 weeks of 2024. The company plans to spend $4.3 to $4.5 billion on capital expenditures in fiscal 2024.

Overall, the financial statements demonstrate Costco’s ability to drive strong revenue growth, maintain efficient operations, and generate robust cash flow, while continuing to invest in its business and return capital to shareholders.

Financial Statements Quarterly 2024 Q1

Strong revenue growth

Costco reported a 6% increase in net sales in both the second quarter and first half of fiscal 2024, driven by a 6% and 5% increase in comparable sales, respectively. This demonstrates Costco’s ability to drive sales growth through increased shopping frequency and higher average ticket.

Membership fee revenue increased 8% in both the second quarter and first half, reflecting growth in new members, upgrades to Executive Membership, and high renewal rates of 92.9% in the U.S. and Canada, and 90.5% worldwide. Maintaining a loyal membership base is crucial for Costco’s business model.

Expanding gross margins

Gross margin percentage increased 8 basis points in the second quarter and 25 basis points in the first half, despite the impact of lower gasoline prices. Excluding gasoline, gross margins expanded 4 basis points in the quarter and 19 basis points year-to-date, driven by the warehouse ancillary and other businesses, as well as a LIFO benefit.

Disciplined cost management

SG&A expenses as a percentage of net sales increased 3 basis points in the quarter but were down 1 basis point excluding the impact of gasoline. For the first half, SG&A deleveraged 14 basis points, primarily due to higher wage costs in the U.S. operations. Maintaining control over expenses is important for Costco’s low-margin business model.

Strong cash flow and balance sheet

Costco generated $5.4 billion in operating cash flow in the first half of 2024 and ended the quarter with $17.0 billion in cash and short-term investments. This provides ample liquidity to fund capital expenditures, dividends, and share repurchases, supporting the company’s long-term growth.

Shareholder-friendly actions

Costco declared a quarterly cash dividend of $1.02 per share and made a special cash dividend payment of $15.00 per share during the quarter. The company also repurchased $322 million of its common stock in the first half of 2024, demonstrating its commitment to returning capital to shareholders.

Overall, Costco’s strong financial performance, healthy membership trends, expanding margins, and disciplined capital allocation make it an attractive long-term investment opportunity for investors.

Financial Statements Quarterly 2023 Q4

Revenue Growth

Net sales increased 6% to $56,717 million, driven by a 4% increase in comparable sales and sales from 25 net new warehouses opened since the prior year. Membership fee revenue increased 8% to $1,082 million, driven by new member signups, upgrades to Executive Membership, and a higher renewal rate.

Profitability

Gross margin percentage increased 43 basis points, primarily due to the warehouse operations and other businesses, as well as the absence of a charge related to the discontinuation of charter shipping activities. SGA expenses as a percentage of net sales increased 25 basis points, primarily due to increased costs in warehouse operations and other businesses, including the impact of wage increases. Net income was $1,589 million ($3.58 per diluted share), compared to $1,364 million ($3.07 per diluted share) in the prior year.

Operational Efficiency

The company opened 10 new warehouses, including one relocation, in the first quarter and plans to open 23 additional new warehouses, including one relocation, in the remainder of fiscal 2024. Capital expenditures were $1,040 million in the first quarter, and the company expects to spend approximately $4,400 to $4,600 million during fiscal 2024.

Capital Allocation

The company declared a quarterly cash dividend of $1.02 per share and a special cash dividend of $15.00 per share subsequent to the end of the quarter. The company repurchased 288,000 shares of common stock during the first quarter at an average price of $56.41 per share.

Overall, Costco’s financial performance in the first quarter of fiscal 2024 was strong, with solid revenue growth, improved profitability, and continued operational efficiency. The company’s focus on providing value to its members, expanding its warehouse network, and returning capital to shareholders remains a key part of its long-term strategy.

Financial Statements Quarterly 2023 Q3

Net sales growth

Costco’s net sales increased 2% in the third quarter and 5% in the first 36 weeks of fiscal 2023 compared to the prior year periods. This was driven by sales at 23 net new warehouses opened since the end of the third quarter of 2022.

Comparable sales growth

Comparable sales, which exclude the impact of changes in foreign currencies and gasoline prices, increased 3% in the third quarter and 6% in the first 36 weeks. This was driven by an increase in shopping frequency, partially offset by a decrease in average ticket.

Membership fee revenue growth

Membership fee revenue increased 6% in both the third quarter and first 36 weeks, driven by new member signups, upgrades to Executive Membership, and a higher renewal rate. Membership renewal rates were 92.6% in the U.S. and Canada, and 90.5% worldwide.

Gross margin performance

Gross margin percentage increased 13 basis points in the third quarter, driven by the core merchandise categories and the absence of a LIFO charge. This was partially offset by a $298 million charge related to the discontinuation of Costco’s charter shipping activities. For the first 36 weeks, gross margin percentage decreased 7 basis points, also impacted by the shipping-related charges.

SG&A expense increase

SG&A expenses as a percentage of net sales increased 49 basis points in the third quarter and 10 basis points in the first 36 weeks, primarily due to higher wages and benefits in warehouse operations and other businesses.

Net income and EPS

Net income was $1,302 million ($2.93 per diluted share) in the third quarter, compared to $1,353 million ($3.04 per diluted share) in the prior year quarter. For the first 36 weeks, net income was $4,132 million ($9.30 per diluted share), compared to $3,976 million ($8.94 per diluted share) in the prior year period.

Capital expenditures and new warehouse openings

Costco spent $2,767 million on capital expenditures in the first 36 weeks and plans to spend $3,800 to $4,200 million for the full fiscal year. The company opened 17 new warehouses, including 3 relocations, in the first 36 weeks and plans to open 9 more in the remainder of fiscal 2023.

Dividend and share repurchases

Costco declared a quarterly cash dividend of $1.02 per share and repurchased 908,000 shares of common stock for $447 million in the first 36 weeks of fiscal 2023.

Overall, Costco delivered solid sales and membership growth, maintained strong profitability, and continued to invest in its business through new warehouse openings and capital expenditures, while also returning capital to shareholders through dividends and share repurchases.

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Earnings Call Analysis

Earnings Call Analysis 2024 Q2

Costco Maintaining Focus on Top-Line Growth and Value Proposition

Costco is maintaining its focus on driving top-line growth and providing value to members, even as inflation moderates. The company is willing to be pragmatic about margins and prioritize sales growth.

Strength Across Multiple Categories

Costco is seeing strength across many categories, including appliances, TVs, tires, and e-commerce. This suggests the company is gaining market share in discretionary categories as consumer spending patterns shift.

Robust Membership Growth and Renewal Rates

The company continues to see strong membership growth and renewal rates, indicating loyal and engaged customers. The gradual increase in Executive membership penetration is also a positive.

Progress on E-commerce Initiatives

Costco is making progress on its e-commerce initiatives, including re-platforming its website, though personalization efforts are still in the early stages. The Costco Next program, while small, provides an additional revenue stream.

Measured Pace of International Expansion

International expansion remains a focus, though the pace is measured due to operational complexities in new markets. Costco sees opportunities to continue growing in existing international markets.

Managing Labor Costs and Wage Inflation

Labor costs and wage inflation remain a headwind, but Costco seems to be managing this proactively through productivity improvements and selective price adjustments.

Overall, Costco appears to be executing well and maintaining its competitive advantages, though the company is not immune to broader economic pressures. The long-term investor should focus on Costco’s ability to drive consistent membership growth, market share gains, and operational efficiency.

Earnings Call Analysis 2024 Q1

Membership Growth and Retention

Costco continues to see strong membership growth, with 7.9% growth in paid household members and 7.6% growth in cardholders year-over-year. This indicates the company is retaining and attracting new members.

Gross Margin Improvement

Gross margins improved 42 basis points year-over-year, with core merchandise margins up 51 basis points. This suggests Costco is able to maintain pricing power and manage costs effectively.

SG&A Deleverage

SG&A deleverage was a concern, up 43 basis points year-over-year, driven by lower sales growth and higher labor costs. However, Costco is committed to maintaining its high level of service and employee compensation.

Digital and Mobile Initiatives

Costco is making progress on its digital and mobile initiatives, with app ratings improving and unique visitors and app installs increasing significantly year-over-year. This suggests the company is investing in improving the customer experience.

Inflation Moderation

Inflation appears to be moderating, with Costco estimating 1-2% inflation in Q4 compared to 3-4% in Q3. This could provide some relief on the cost side going forward.

Store Expansion

Costco is continuing to expand its store base, with plans for mid-to-high 20s net new units in fiscal 2024, the majority in the U.S. and Canada. This indicates the company sees further growth potential in its core markets.

Inventory Management

The company remains disciplined on inventory management, with inventories in good shape overall. This suggests Costco is avoiding the excess inventory issues plaguing some retailers.

Overall, Costco appears to be navigating the current economic environment well, maintaining its strong membership growth, pricing power, and operational efficiency. The company’s long-term focus and commitment to providing value to members remains a key competitive advantage.

Earnings Call Analysis 2023 Q4

Lowering Prices for Members

Costco is focused on lowering prices for members by taking advantage of improved shipping and freight markets. They recently discontinued their charter shipping activities to reduce higher contracted rates.

Strong Membership Metrics

Costco’s membership metrics remain strong, with renewal rates at all-time highs of 92.6% in the U.S. and Canada, and 90.5% worldwide. Membership growth continues, with paid household members up 7% year-over-year.

Margin Management

Gross margins were up 13 basis points year-over-year on a reported basis, though down 3 basis points excluding gas deflation. Costco is managing margins carefully, investing in price to drive sales.

SG&A Expenses

SG&A expenses were up 49 basis points year-over-year on a reported basis, driven by slower sales growth and some wage increases. Costco continues to invest in its employees.

Moderating Inflation

Costco sees inflation moderating, estimating 3-4% year-over-year in the quarter, down from 8-9% previously. They are working closely with suppliers to pass along cost savings to members.

Inventory Management

Inventory levels are in good shape after being elevated due to supply chain challenges. Costco is managing inventory proactively.

International Expansion

Costco is focused on expanding internationally, with plans to open 23-25 net new warehouses per year over the next 5 years, with a goal of reaching a 50/50 split between U.S./Canada and international locations.

Digital and Data Analytics

Costco is making investments in digital and data analytics to improve personalization and targeted marketing, though they remain focused on driving in-store traffic and sales.

Overall, Costco appears to be navigating the current environment well, maintaining strong membership engagement and finding ways to invest in price and its employees while managing costs. The long-term growth opportunity, especially internationally, remains promising.

Earnings Call Analysis 2023 Q3

Driving Sales and Market Share

Costco is focused on driving sales and market share, even if it means investing in lower prices to maintain its competitive advantage. The company is willing to prioritize sales growth over short-term profitability.

Shifting Product Mix

Costco is seeing some softness in big-ticket discretionary categories like electronics and home goods, but its core food and consumables business remains strong. The company is managing this mix shift by investing in pricing and promotions in the weaker categories.

Moderating Inflation

Inflation appears to be moderating, with Costco estimating year-over-year inflation in the 5-6% range in Q2, down from 6-7% in Q1 and 8% in Q4 2022. This provides some relief on the cost side.

Membership Metrics

Costco’s membership metrics remain very strong, with renewal rates at all-time highs. The company continues to see growth in both paid household memberships and executive memberships, which account for a growing share of sales.

Supply Chain and Inventory Management

The company is focused on improving its supply chain and inventory management, with inventory levels now down 2% year-over-year after being up significantly in prior quarters.

Cost Structure and Pricing Competitiveness

Costco is actively looking for ways to further improve its cost structure and pricing competitiveness, including exploring more global sourcing and production opportunities.

Outlook

While the company does not provide specific guidance, management seems confident in its ability to navigate the current economic environment and continue driving sales and market share growth.

Overall, Costco appears to be managing the business well, maintaining its focus on providing value to members while also protecting profitability. The company’s strong membership metrics and flexible business model suggest it is well-positioned for long-term success.

Earnings Call Analysis 2023 Q2

Pricing Strategy and Margin Pressure

Costco is focused on remaining highly competitive on pricing, even if it means accepting some margin pressure in certain categories like fresh foods. The company is willing to hold prices on some items despite inflated costs to drive sales and market share.

Discretionary Spending Softness

Costco is seeing some softness in big-ticket discretionary categories like electronics and appliances, likely due to a combination of tough year-over-year comparisons and broader economic pressures. However, the company’s core food and sundries business remains strong.

Inventory Management

Costco is making progress on reducing excess inventory levels, which had built up due to supply chain challenges. The company took a one-time charge to downsize its charter shipping activities as shipping conditions have improved.

Membership trends remain robust, with renewal rates holding steady at high levels. Costco continues to see growth in higher-income members, which is a positive indicator.

Guidance and Long-Term Focus

While Costco is not providing specific guidance, management indicated they are focused on the long-term and will continue to invest in driving sales and market share, even if it means near-term margin pressure. The company has ample levers to pull on pricing and costs to manage through a more challenging economic environment.

Membership Fee Approach

Costco is maintaining a measured approach to raising membership fees, noting there is no rush to do so despite the strong value proposition for members. The company will time any increase based on the broader economic and competitive environment.

Overall, Costco appears to be navigating the current environment well, leveraging its strong membership model and value proposition to drive continued growth. The company’s long-term focus and willingness to invest in the business are positive signs for long-term investors.

Earnings Call Analysis 2023 Q1

Costco Remains Focused on Driving Top-Line Sales Growth

Costco remains focused on driving top-line sales growth rather than aggressively raising prices or margins. The company is willing to maintain competitive pricing on key items like the hot dog and soda combo.

Signs of Relief on Inflation, but Wages Remain a Concern

Costco is seeing some signs of relief on inflation, with certain commodity prices like corn and resin starting to come down. However, wages remain a sticky inflationary pressure.

Improving Inventory Levels and Supply Chain

Costco’s inventory levels, while up 26% year-over-year, are starting to improve as supply chain issues ease. The company is working to clear out some excess seasonal inventory.

Strong Membership Metrics

Costco’s membership metrics remain strong, with renewal rates at all-time highs and executive membership penetration continuing to grow. This provides a stable, recurring revenue stream.

Investing in Logistics Capabilities

The company is investing in its logistics capabilities through Costco Logistics, which is improving delivery times and reducing costs on big and bulky items.

Cautious Approach to Membership Fee Increases

Costco is cautious about raising membership fees, seeing the current environment as not ideal for such a move. However, they maintain that as an option to drive earnings growth when the time is right.

Overall, Costco appears to be navigating the current inflationary and economic environment well, focusing on maintaining its value proposition for members while gradually improving margins where possible. The company’s strong membership model and logistics capabilities position it well for long-term growth.

Earnings Call Analysis 2022 Q4

Strong Sales Growth

Costco is continuing to see strong sales growth, with Q3 net sales up 16.3% year-over-year. This was driven by increases in both traffic (up 6.8% worldwide) and average transaction size (up 7.6% worldwide).

Membership Fee Income Growth

Membership fee income grew 9.2% year-over-year, with the US/Canada renewal rate hitting an all-time high of 92.3% and the worldwide renewal rate reaching 90% for the first time. This indicates strong member loyalty.

Margin Management

Gross margins were down 99 basis points year-over-year, primarily due to higher costs in fresh foods and the impact of higher gas prices. However, Costco was able to offset this with 84 basis points of SG&A leverage.

Inflation and Pricing

Costco is seeing significant inflation, with estimated price inflation of 7% in Q3. They are working to balance passing on higher costs while maintaining their value proposition for members.

Inventory Management

Inventory levels are up 26% year-over-year, with some excess in certain discretionary categories, but Costco believes they can manage through this inventory.

Expansion Plans

Costco is continuing to expand, with plans to open 24 net new warehouses in fiscal 2022, including its first location in New Zealand.

Commitment to Value

The company remains committed to maintaining its $1.50 hot dog and soda combo price, despite inflation pressures.

Overall, Costco appears to be navigating the current inflationary and supply chain environment well, maintaining strong sales and membership growth while carefully managing margins. The company’s focus on value and member loyalty remains a key competitive advantage.

Earnings Call Analysis 2022 Q3

Costco Continues Strong Sales and Membership Growth

Costco continues to see strong sales and membership growth, with membership renewal rates at all-time highs. This suggests the company is maintaining its value proposition for customers.

Inflation and supply chain challenges remain significant headwinds, but Costco seems to be managing them well by working closely with suppliers, chartering its own shipping vessels, and trying to mitigate cost increases as much as possible.

Cautious and Methodical Unit Growth Plans

Costco is being cautious and methodical with its unit growth plans, both domestically and internationally. It is focused on maintaining operational efficiency and profitability as it expands.

Prioritizing Customer Value over Short-Term Profit

The company is not rushing to raise membership fees, indicating it is prioritizing maintaining customer value over short-term profit maximization. However, a fee increase could come in the next 6-12 months.

Investing in Omnichannel Capabilities

Costco is investing in e-commerce and logistics capabilities to enhance the omnichannel experience, but physical stores remain the core focus and strength of the business.

Pricing Power and Competitive Pricing

The company appears to have pricing power and is able to pass along some cost increases, but is also working to remain highly competitive on pricing versus its peers.

Overall, Costco seems to be executing well and maintaining its strong market position despite the challenging macro environment. The company’s focus on value, membership loyalty, and disciplined growth suggests it is well-positioned for long-term success.

Earnings Call Analysis 2022 Q2

Inflationary Pressures and Margin Management

Costco has been able to manage inflationary pressures well, with overall year-over-year price inflation estimated at 4.5-5% in Q1. Costco is working to mitigate cost increases and keep prices low for members. Costco’s core merchandise margins, while down year-over-year, have retained a good portion of the improvement seen two years ago. This suggests Costco may have structurally higher gross margins going forward.

Logistics and E-commerce Investments

Costco’s investments in logistics and e-commerce fulfillment are paying off, with Costco Logistics now handling 70% of U.S. e-commerce big and bulky shipments. This helps drive e-commerce growth.

Membership Renewal Rates

Renewal rates continue to improve, benefiting from more members auto-renewing and higher penetration of executive members who renew at higher rates.

Supply Chain Management

Costco is being proactive in managing supply chain challenges, ordering inventory earlier and finding ways to mitigate cost and price increases for members. While Costco is seeing some moderation in retail inflation, the company expects more price increases from suppliers in the coming months. Costco believes the inflationary environment may actually benefit their value proposition.

Capital Expenditures

Costco is continuing to invest in CapEx, with a focus on international expansion, logistics/fulfillment, and IT. The company sees the current $4 billion annual CapEx level as appropriate for the next year or two.

Overall Assessment

Overall, Costco appears to be navigating the current environment well, leveraging its scale and member focus to maintain its value proposition. The company’s investments in key areas like logistics and e-commerce also position it well for the long-term.

Earnings Call Analysis 2022 Q1

Costco is navigating supply chain and inflation challenges well by ordering products early, chartering ships, and leasing containers to ensure inventory availability. This has allowed them to maintain strong sales despite the challenges.

Selective and Strategic Pricing

Costco is being selective and strategic in passing on price increases to members, aiming to maintain its reputation for extreme value. The company is absorbing some cost increases rather than fully passing them on.

Membership Metrics Remain Strong

Costco’s membership metrics remain strong, with renewal rates improving and executive membership penetration increasing. This suggests the company is retaining and growing its loyal customer base.

E-commerce Growth and Digital Capabilities

Costco’s e-commerce business continues to grow, with Costco Logistics driving strong big and bulky sales. The company is investing in improving its digital capabilities.

Profitability Outlook

While Costco does not provide formal guidance, the CFO indicated the company’s profitability could continue to benefit from its ability to drive stronger than industry average comparable sales growth.

Balanced Approach to Growth

Costco appears to be taking a balanced approach, investing in its employees, infrastructure, and member value proposition, while also maintaining financial discipline. This suggests the company is well-positioned for long-term sustainable growth.

Overall, Costco seems to be navigating the current challenges effectively and maintaining its competitive advantages, which should benefit long-term investors.

Earnings Call Analysis 2021 Q4

Strong Sales Growth Driving Margin Expansion

Costco is seeing strong sales growth, with 21.7% year-over-year increase in Q3. This is driving significant operating leverage and margin expansion.

Inflationary Pressures and Mitigation Strategies

Inflationary pressures are building across various input costs like labor, freight, commodities, etc. Costco is trying to mitigate these through efficiency gains, but some price increases are likely to be passed on to consumers.

Robust Membership Metrics

Costco’s membership metrics remain very strong, with 91% renewal rates in the U.S. and Canada. The company continues to add new members at a healthy pace.

Costco Logistics and Growth in Big and Bulky Categories

Costco Logistics, the company’s in-house delivery and logistics platform, is driving growth in big and bulky categories like furniture and appliances. This is a strategic focus area with significant long-term potential.

Return of In-Store Sampling and Food Courts

The company is cautiously optimistic about the return of in-store sampling and food courts, which should help drive traffic and sales in the coming quarters.

Disciplined Approach to New Store Openings

Costco is maintaining a disciplined approach to new store openings, targeting around 25 net new units per year over the next 2 fiscal years. This measured expansion strategy seems prudent.

Overall Assessment

Overall, Costco appears to be navigating the current inflationary and supply chain challenges well, leveraging its scale and operational efficiency to protect margins. The company’s membership model and value proposition remain strong.

Earnings Call Analysis 2021 Q3

Gross Margin Expansion

Costco has seen strong gross margin expansion in recent quarters, driven primarily by efficiencies and productivity gains in the core merchandise categories, especially fresh foods. However, this strength in fresh may subside over time as the comparison gets tougher.

SG&A Leverage

Costco has been able to leverage its strong sales growth to drive SG&A efficiencies, excluding the one-time COVID-related costs. The core operations component of SG&A has been significantly leveraged.

COVID-19 Impacts

Costco incurred significant COVID-related costs over the past year, primarily in the form of premium wages and other pandemic-related expenses. These costs are expected to be reduced by over 50% going forward as the $2/hour premium pay has been discontinued.

Inflation and Supply Chain

Costco is seeing some inflationary pressures, particularly in areas like freight, container costs, and certain commodity costs like meat. However, they are trying to be “the last to raise and the first to lower” prices to maintain their competitive position.

Ancillary Businesses

The ancillary businesses, especially gas, have been a drag on gross margins recently due to the volatility in gas prices. As these businesses normalize, they should provide a tailwind to margins.

E-commerce and Logistics

Costco continues to invest in e-commerce and its Costco Logistics (Innovel) acquisition to drive growth in big and bulky items. While initially dilutive, these investments are expected to pay off long-term.

Membership and Renewal Rates

Costco’s membership and renewal rates remain strong, and they are focused on initiatives like the Citi Visa card and auto-renewal to further drive loyalty and retention.

Overall, Costco appears to be navigating the pandemic-related challenges well, leveraging its operational efficiencies and strong customer loyalty to drive continued growth. The long-term investor should focus on Costco’s ability to maintain its competitive pricing and operational advantages.

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The information provided on this blog is for informational purposes only and should not be considered as financial advice. You should consult with a qualified financial professional before making any investment decisions. Past performance is not indicative of future results. Investing involves risk, including the potential loss of principal.