Categories Analysis, Retail

Will cost pressure prevent Costco (COST) from repeating Q4 success?

In the fourth quarter, margins came under pressure from costs related to safety measures and wages, and the trend is expected to continue

There were not many surprises when Costco Wholesale Corporation (NASDAQ: COST) released its latest financial report this week because the performance of the other retailers who reported earnings earlier had provided a sense of what to expect from the warehouse giant.

The company ended fiscal 2020 on an upbeat note but the excitement was dampened by the high costs it incurred in the final months of the year. The drag on investor mood was evident from the performance of the stock during the post-earnings session. It has lost about 3% since then amid concerns that the company is yet to take full advantage of the COVID-driven grocery boom.

Investing in COST

It seems the stakeholders were expecting the results to beat estimates by a wider margin, hence the disappointment. When it comes to investing in COST, it makes sense to take a cue from its impressive past performance that shows where the company is headed. Even at its peak, the stock is considered fairly valued and with more room for grow. Analysts’ consensus rating is moderate buy. Costco has always been an attractive investment option for those who can afford it, thanks to the solid fundamentals and ever-growing customer base.

Cost Pressure

Like most retailers, higher costs related to sanitization and safety measures could weigh on Costco’s margins in the current year, as they did in the most recent quarter. Also, the grocery boom is probably softening even as markets limp back to normalcy and households get used to the new normal. So, there might not be much of bulk purchasing happening in the coming months.

Costco (COST) Q4 earnings, revenue beat Street view

Costco’s chief financial officer Richard Galanti sounded pretty optimistic in his remarks during the conference call. “…On a macro basis, when people start eating out more and start flying more and attending — going on vacations, some of these monies that are now being used for purchasing things for the home is going to move that way. That being said, I think there are several areas where we’ve — we are retaining more of their dollars and some portion of that will continue to retain when it gets back to normal,” he said.

All in the Store

Interestingly, Costco remains traditional in the shopping experience it offers, unlike other major retailers that encourage the use of options like curbside pickup as a safety precaution. The management expects that the spaciousness of the stores with wide aisles, along with the strict safety protocol, would create the right ambiance for customers to engage in risk-free shopping.

Related: General Mills Q1 2021 Earnings Call Transcript

Walmart (WMT), which unveiled its second-quarter numbers last week, achieved 10% same-store sales growth for two consecutive quarters, benefiting from the shopping spree triggered by the virus outbreak. A similar pattern was visible in the performance of rival department store chain Target Corporation (TGT).

Blockbuster Q4

Costco’s earnings exceeded expectations regularly in recent times, though with a few exceptions, and the trend continued in the final three months of 2020. At $1.4 billion, net profit was up 27% from the year-ago quarter, while revenues surged to more than $53 billion reflecting double-digit growth in merchandise sales. Comparable store sales grew at a record rate of 11.4% and there was a 91% growth in e-commerce sales.

E-commerce Lags

The share of Costco’s online sales remained below 10% of total sales last year, despite the management making efforts to ramp-up its digital capabilities. If the shelter-in-place orders are extended, Costco’s store traffic would get affected and the absence of a full-fledged digital platform might put pressure on revenues. Meanwhile, the company’s store network keeps expanding, adding new units every quarter both locally and internationally.

I think we’re just about ready to do a second unit in France. We just opened our third unit in Spain after having opened our first unit in Spain, gosh five years ago. We have one unit in China with two planned for fiscal 2022, we’re now in fiscal 2021. And so some of these countries do take longer. But we are also putting a little bit more emphasis on that where we’ve been successful, we think we can be successful.

Richard Galanti, chief financial officer of Costco

Read management/analysts’ comments on Costco’s Q4 report

Costco’s stock has been in an upward spiral for quite some time, hitting new highs consistently. The shares gained 17% since the beginning of the year, though they experienced volatility in the early days of the pandemic. After closing the previous session at $347, the stock traded lower during Friday’s session, extending the downtrend that followed the earnings report.

Looking for more insights?

Read the full conference call transcript here. It’s free!

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