Costco Beats Earnings Expectations, But Investors Remain Lukewarm
Key Takeaways:
- Costco released its quarterly earnings report on Tuesday, beating Wall Street’s expectations.
- Despite the strong earnings, Costco did not raise its membership fees as expected, which likely caused the dip in its stock price following the report.
- Costco is seeing a decrease in big-ticket and discretionary sales, but is holding strong in grocery sales.
- Selling, general, and administrative expenses rose in Q4, driven in part by an increase in starting wages.
Costco earnings for Q4 beat Wall Street’s expectations, coming in at $4.86 per share and $78.9 billion in revenue.
The improvement is fueled primarily by the social dynamics of the pandemic, which led to more people cooking from home, as well as an increasingly value-oriented mindset among consumers as they try to stay ahead of inflation and the rising cost of living. As a result, Costco is seeing strong sales in grocery and food products, but discretionary and big-ticket items have not been performing as well.
Despite the company’s strong performance in Q4, investors reacted tepidly. Costco stock (NASDAQ: COST) dipped 1.01% on Tuesday following the earnings call but rose 1.91% the next day.
The lukewarm reaction among investors is likely due to Costco’s decision not to raise its membership fees, which represents a break from its typical schedule. On average, Costco increases its fees every five years and seven months, the last time being June 2017, which makes it close to 10 months overdue for an update. Its decision to hold off on the price bump for yet another quarter seems to have investors worried about the company’s growth given that most of Costco’s revenue comes from membership fees.
Acknowledging these concerns, Costco’s CFO, Richard Galanti, said that a membership fee increase is “a question of when, not if.” However, he did not give any indication when that raise would occur.
Costco also defied expectations by changing its wages earlier than expected, boosting starting salaries for new employees. Typically, Costco restructures its pay structure every March.
As Americans tighten their belts, it’s Costco’s time to shine
Costco’s value proposition is value — the company has historically performed well during recessions as consumers look to keep their costs low. Some have gone so far as to call Costco “recession proof.”
This bears out in Costco’s earnings data, with memberships increasing almost 8% compared to a year ago. Additionally, more members have signed up for Costco’s more expensive Executive Membership, priced at $120 per year, instead of the standard membership for $60–45% of Costco’s members now have an Executive Membership.
In this context, Costco’s delay in raising its membership fees isn’t necessarily cause for significant concern. Strategically, if membership is predicted to continue increasing, keeping fees low could reduce barriers to entry when interest in becoming a member is at its highest, and increasing fees with a larger membership base in place could help mitigate the effects of member attrition.
Indeed, in an interview with Yahoo! Finance Live, CFRA analyst Arun Sundaram said he believes that a price increase could happen “by the end of this year,” coinciding with a tempering of inflation that could potentially lead to slowing membership growth.
The bottom line
Overall, Costco stock remains strong, with shares up approximately 23% this year, backed by a company that’s entering some of its ideal growth conditions.
However, the company does face issues with rising expenses due to increasing wages and a decrease in sales of big-ticket items. A membership fee increase could help overcome those obstacles, but it’s unclear when one will be implemented.
