Costco reports solid sales gains, but higher pressure margins
Costco Wholesale Corp. reported product sales growth of 14.9% for U.S. stores in the company’s fiscal fourth quarter, which ended Aug. 29, supported by higher traffic and higher spend per trip.
But in an “increasingly inflationary environment,” said Richard Galanti, executive vice president and CEO of the Issaquah, Wash., Wholesale club, the quarter’s gross margin fell 32 points. base from year to year. For commodities, margins fell 40 basis points, due to lower margins on fresh produce, as Costco chose to delay or moderate price increases on items such as fresh meat then as costs increased.
Overall, fresh food costs have increased in mid to high single-digit percentages, he said, while meat costs have increased in high single- and double-digit percentages.
“It’s a lot of fun right now,” Galanti said on a conference call with investors and analysts, highlighting the inflationary pressures Costco sees: “Higher labor costs, higher freight costs high, higher transport demand, as well as container shortages and delays at ports, increased demand for certain product categories, various shortages of everything from computer chips to oils and chemicals, higher product prices basic.”
And while “we’re not going to change the price of muffins every week,” Galanti said, the continued rise in costs has caused the company to increase its selling price estimates in the 3.5% range to 4. , 5%, against about 2.5%. to 3.5% at the end of the company’s third quarter in May and from 1% to 1.5% in February.
Costco reported net income for the quarter of $ 1.67 billion, or $ 3.76 per share.
Galanti noted that the club, which saw traffic increase 8.8% for U.S. stores in the quarter, reinstated purchase limits on certain items, including toilet paper, paper towels, certain products. cleaning and Kirkland Signature water as demand increased along a delta. National outbreak fueled by variants in new COVID-19 cases. These purchasing limits also reflect supply chain issues that have changed over the past year, he said.
“A year ago there was a shortage of goods,” said Galanti, speaking specifically of a popular variety of nationally branded disinfectant wipes. “Now they have a lot of cargo, but there are two or three week delays in getting them delivered because there is a limit to the short term changes in trucking and delivery needs.” These types of logistical challenges are “ubiquitous,” he said.
For hardlines, deployment times have been reduced from 16 to 18 weeks, from eight to 12 weeks, and clubs typically sell goods within two weeks of receiving them, Galanti noted. Echoing comments from other retailers, including Target, this earnings season, the company is also ordering “earlier and earlier” ahead of the holidays and bringing in high-demand giveaways earlier, including toys. In an effort to gain additional control over its supply chains, Costco has chartered three ocean-going vessels for the coming year to transport containers between China and the United States and Canada, he said. .
Good news for the company, renewal rates edged up to 91.3%, an increase of 0.3 percentage points from the fiscal third quarter. During the year, Costco opened 20 new locations and relocated two more. For fiscal year 2022, the company plans to open at least 25 new units and relocate five more. In terms of customer-centric technology, digital payment using the Costco credit card is in testing in several locations, Galanti said, with a full rollout expected by mid-October. Club members will also find a new landing page and improved mobile site by the end of next month, he said.
More members are renewing automatically, Galanti noted, and first-year renewal rates have improved as well. Members’ strong affinity for their clubs puts Costco in a good position for fiscal 2022 despite the various supply chain challenges and inflationary pressures the company faces, Galanti said.– and Costco doesn’t take it for granted. “Despite all of these issues, we continue to work to mitigate cost increases in different ways and maintain and / or mitigate our price increases passed on to members,” he said.
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