Costco Stock Slides As Profit Margins Narrow, But Hot Dog Costs, Membership Fees Safe

Costco Wholesale  (COST)  shares moved lower Friday after the bulk retailer posted better-than-expected fourth quarter earnings but noted pressures on profit margins amid surging inflation costs and shifting consumer habits. 

Costco said diluted earnings for the three months ending on August 28, its fiscal fourth quarter, rose 11.7% from last year to $4.20 per share topping Street forecasts by around 4 cents per share. 

Total revenues were up 15% to $72.091 billion, just ahead of analysts’ forecasts of a $72.07 billion tally, with membership revenues rising 7.5% to $1.327 billion. Same store sales were up 13.7% globally and 15.8% in the United States, Costco said, with e-commerce sales rising 7.1%.

Gross margins narrowed by around 80 basis points to 10.18%, Costco noted, while overall inventories were up 26% from last year, with some modest improvement over “just the past few weeks”. 

The group also said that it’s seeing signs of moderating inflation pressures and noted that season sales “seem to be going well”.

“In terms of membership fees and a possible increase, there are no specific plans regarding a fee increase at this time,” CFO Richard Galanti told investors on a conference call late Thursday. “We’re pleased with our growth in both top line sales and membership households over the last several quarters and in member loyalty as reflected in increasing member renewal rates. 

“We’ll let you know when something is about to happen,” he added, noting that higher margin businesses like gasoline sales and travel services “help us be more aggressive in other areas (and) hold the price on the hot dog and the soda a little longer, forever.”

Costco shares were marked 3.3% lower in pre-market trading to indicate a Friday opening bell price o $471.01 each, a move that would extend the stock’s six-month decline to around 15%.

Sliding gas prices may explain why revenues were only modestly ahead of forecasts, as pump costs fell more than 20% from their record high of $5.10 per gallon in early June to the end of Costco’s fourth quarter, while core inflation eased from 1% in May to 0.1% in August.

“We see no slowdown to Costco’s robust top line trends, which have been consistent in the +30% range on a three year basis,” said D.A. Davidson analyst Michael Baker, who held onto his ‘neutral’ rating following last night’s earnings while lifting his price target by $5 to $445 per share.

“But, we believe Costco’s premium valuation requires a bigger profit and earnings beat, and better gross margin trends,” he added. “As such, we would not be surprised to see some pressure on the stock.”  

Earlier this week, big retail rival Target Corp  (TGT)  unveiled plans to hire 100,000 employees to support its holiday sales effort, adding it plans to offer early seasonal discounts as it continues to monitor inventory levels following an unwanted build-up earlier this year, a plan that contrast with only 40,000 seasonal additions planned at rival Walmart  (WMT) .

Deloitte’s holiday retail sales forecast, published earlier this month, indicates overall holiday purchases will rise between 4% and 6% from last year to around $1.46 trillion, a marked slowdown from the 15% gains recorded over the same period in 2021.

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