Costco’s Quarterly Results Likely to Reinforce Retail’s Uncertainty

Key Takeaways

  • Costco’s net income likely increased 10% on a year-over-year basis.
  • However, the company’s expected to report comparable sales growth declined for the seventh straight quarter.
  • Despite January’s unexpected surge in U.S. retail sales, Amazon, Walmart, and Home Depot all have warned of slowing consumer demand.

Retail warehouse giant Costco Wholesale Corp. (COST) likely will report its weakest sales growth in more than three years when it reports its fiscal second-quarter results Thursday, joining peers either suffering slowing sales growth or warning they lie ahead.

Net sales at Costco likely increased 7.1% to $54.5 billion, boosting its overall revenue forecast (including customer membership fees) by 7.2% to $55.6 billion from $51.9 billion a year ago, according to estimates compiled by Visible Alpha. The company’s net income likely increased 10% to $1.4 billion, or $3.26 per share, from $1.3 billion, or $2.92 per share.

Costco’s weakening sales growth defies data showing unexpected strength in overall U.S. retail sales in January. But it mirrors warnings earlier this month from Amazon, Walmart, and Home Depot, all of which foresee slowing growth and uncertainty in coming months.

Comparable sales at Costco stores likely increased 5.4%, which would mark the seventh consecutive quarter in which the company’s comp sales decreased compared with the prior quarter.

It also would represent the lowest quarterly comp sales gain since the depths of COVID-19 shutdowns in mid-2020. Until last quarter, they rose 6.6%, comp sales had increased 11-21% on a year-to-year basis in nine straight quarters.

Meanwhile, along with other retailers, Costco’s expenses have risen. Its quarterly merchandise costs are expected to rise 6.8% compared with a year ago, according to Visible Alpha, reducing its gross profit margin slightly to 12.1%.

On a positive note, Costco’s membership probably kept rising in the quarter to an estimated 67.4 million households. The expected increase of 480,000 from the fiscal first quarter would extend the company’s string of sequential quarterly membership gains dating to at least mid-2013, when it had about 40-million-member households.

Membership fees, however, account for only about 2% of the company’s overall revenue.

Costco’s Key Stats
   Q2 FY2023 (est)  Q2 FY2022  Q2 FY2021
 Adjusted EPS  $3.26  $2.92  $2.14
 Revenue  $55.6B  $51.9B  $44.8B
 Comp sales increase  5.4% 14.4%  13.0%

Source: Visible Alpha

Uncertain Investors

Costco’s stock price in the past few months has reflected investors’ uncertainty about the retail sector’s prospects.

Since the company reported its fiscal first quarter results on Dec. 8, its shares have gained 1.5%. In that time, though, Costco’s shares have traded in a broad range of $447-$530 per share. The S&P Retail Select Industry Index has experienced similar, though more modest, swings.

Costco shares are down more than 5% during the last year, compared with a 19% loss for the S&P 500 Consumer Discretionary sector.

Source: TradingView.

Retail Execs Foresee More Turbulence

In its recent 2023 retail industry outlook, Deloitte noted that only one-third of retail executives surveyed expressed considerable confidence about the ability of their companies to maintain or improve profit margins this year.

Almost all those executives, Deloitte said, indicated inflation and diminished consumption would squeeze margins—a key departure from low inflation and surging demand they experienced amid the pandemic recovery of 2021-22.

“Change can be good, but constant change can be daunting,” Deloitte’s report stated. “Retailers today are feeling the hangover of such volatility occurring in the most condensed time frame of any recent business cycle.”

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