In a robust fiscal fourth quarter (Q4) performance, wholesale retail giant Costco (COST) surpassed Wall Street projections, though investor caution lingers over wage inflation and sales downturns. As of Wednesday afternoon, Costco’s stock experienced a 1% uptick, rebounding from early trading losses.
CFRA analyst Arun Sundaram noted a mix of positives and negatives in terms of margins. Gross margins exhibited a notable 40 to 50 basis points year-over-year increase, presenting a substantial positive. However, Sundaram pointed to persistent concerns over wage inflation, which are anticipated to persist into the next fiscal year and impact both Costco and the broader retail sector.
Citi analysts revealed an unexpected deviation from Costco’s usual practices, with the company implementing an unplanned investment in starting salaries for new hires, a move contrary to their customary March adjustments. This shift followed Walmart’s alteration of its pay structure over the summer, a maneuver that reduced certain starting wages by $1 but included raises for other employees. During the earnings call, Costco CFO Richard Galanti clarified that Walmart’s adjustments did not factor into Costco’s decision-making process. Galanti emphasized Costco’s commitment to providing the most competitive hourly wage package in the U.S., encompassing wages, benefits, and retirement contributions.
The fiscal fourth quarter saw a noteworthy 8.96% increase in selling, general, and administrative (SG&A) expenses, inclusive of labor costs, up from 8.53% the previous year. Meanwhile, sales were affected by reduced spending on high-ticket items and discretionary purchases. Costco experienced a 3.9% decline in average ticket size worldwide and a 4.5% drop in the U.S. compared to the previous year. Same-store sales, inclusive of gas and foreign exchange, fell slightly short of estimates, registering a 1.1% increase in contrast to the anticipated 1.87%.
Despite these challenges, Costco had significant achievements in its Q4, surpassing projections, with shares soaring approximately 23% this year. Forrester Research retail analyst Sucharita Kodali acknowledged the retailer’s resilience, stating that it has maintained stability despite consumer confidence issues and reduced discretionary spending.
Costco has demonstrated a degree of resilience in the face of economic uncertainty, historically performing well during macroeconomic downturns. From 2008 to 2011, shares experienced a notable 27% surge. Kodali explained that Costco’s business model tends to be recession-resistant, a trait shared with mass merchants like Walmart, as consumers often seek value in times of economic uncertainty.
While some experts, like Sundaram, have reservations about Costco’s valuation and hold a Hold rating on shares, others believe the premium valuation is warranted. Over the past decade, the company’s market cap surged from $100 billion to over $250 billion.
BMO Capital Markets analyst Kelly Bania highlighted Costco’s consistency as a key factor supporting its premium valuation. Membership fee revenue emerged as a vital driver, surpassing Wall Street estimates at $1.51 billion, up from $1.04 billion in the third quarter.
Paid household members increased by 7.9% to 71 million compared to the previous year, while cardholders rose by 7.6% to 127.9 million. Costco opted to postpone another round of membership cost increases this quarter, but Galanti emphasized that it’s a matter of “when,” not “if.” Typically adjusting prices every five years and seven months on average, Costco last raised membership fees in June 2017, with Gold Star and Executive Memberships priced at $60 and $120 per year, respectively.
As inflation begins to stabilize, CFRA’s Sundaram anticipates a potential price hike by the end of this year, estimating an increase between $5 and $10 for memberships.
Source: Yahoo Finance