Costco first quarter not as weak as it seems

Don’t be fooled by Costco’s tepid sales growth and first quarter profit decline. The company is accelerating expansion and pursuing some intriguing digital partnerships while members continue to renew at record rates.



Costco is planning on a net increase of 32 new warehouses (10 more than last year) during the current fiscal year and 13 of those locations opened during the company’s first quarter ended Nov. 22. Of the 13 new clubs, seven are in the U.S., and of the full year total of 32, 22 will be in the U.S. The company ended the first quarter with 697 clubs, of which 487 are in the U.S., where it enjoys a 91% renewal rate and it executive memberships (those who pay an annual fee of $110) continues to grow.



Costco CFO Richard Galanti said the company gained 307,000 new executive members during the first quarter, giving it a total of about 16.4 million executive membership out of a total member base of 45.4 million. Executive members represent about one third of Costco’s membership base but account for two thirds of sales, according to Galanti.



Member loyalty and accelerating expansion aside, Costco sales grew slowly during the first quarter and were negatively affected by lower year over year gas prices and the stronger dollar. Total sales increased 1% to 26.6 billion while total company same store sales decline 1%. However, strip out fuel and foreign exchange effects and total company same store sales increased 6%.



Fuel and foreign exchange, along with several other expense headwinds, caused Costco’s net income to decline to $480 million from $496 million. Earnings per share of $1.09, were below the prior year’s $1.12 and analysts’ consensus estimate of $1.17.



As for the expense headwinds, Costco has been spending heavily on information technology upgrades and it also experience increased costs for the 4,600 employees who receive stock based compensation.



In other noteworthy developments, Galanti said e-commerce sales grew by 15% in the first quarter and represent about 3% of the company total sales. Although Thanksgiving weekend fell outside of the company’s reporting period, Galanti said e-commerce sales increased 28%.



Other online highlights include growth from digital players who buy products from Costco. For example, Galanti said Google Express now fulfills orders from Costco in San Francisco, Los Angeles, Manhattan, Chicago, Boston and Washington, D.C. Instacart offers its customer access to Costco in 16 markets compared to three markets each for Boxed and Jet.com.



The company also continues to make cross border trade inroads with Alibaba’s T-Mall in China. Costco offers 200 products, mainly its store brand Kirkland Signature items, on T-Mall and during China’s Singles Day it had 300,000 orders.