Costco Wholesale saw sales growth moderate in its fiscal 2020 third quarter as coronavirus-driven stock-up purchases tailed off, though grocery and other core categories fueled booming e-commerce sales.
Earnings fell short of Wall Street’s forecast as the warehouse club chain took a hit from incremental expenses related to COVID-19.
For the 12-week quarter ended May 10, net sales totaled $36.45 billion, up 7.3% from $33.96 billion a year earlier, Costco said yesterday after the market close. Membership fee income increased 5% to $815 million. The renewal rate was 91% in the United States and Canada and 88.4% internationally.
Overall comparable sales rose 4.8% year over year but were up 7.8% excluding fuel and foreign exchange.
U.S. comp sales gained 5.9% (+8% excluding fuel and forex) in the quarter. Costco’s Canadian clubs saw total comps fall 2.5%, but backing out fuel and forex the comp figure showed 3% growth. International comp sales climbed 6.2% and were up 12.2% excluding fuel and forex.
“In terms of traffic, our shopping frequency decreased in the quarter worldwide by 4.1% and in the U.S. by 2%,” Chief Financial Officer Richard Galanti told analysts in a conference call late Thursday. “Our average transaction ticket was up 9.3% during the third quarter, and the 9.3% does include the negative impacts from gas deflation and FX.” The shutdown of some ancillary businesses such as optical, hearing aids, photo and food courts (no seating and limited menu), also shaved comp sales results by one to two points, he added.
Trends reflecting the impact of COVID-19 showed a jump in sales starting in late February and lasting through mid-March and then lower but continued strong growth thereafter, with the purchase category mix shifting more toward lower-margin, nondiscretionary items, according to Galanti.
“Recently, our sales have started to recover somewhat as states have begun to relax restrictions. Within the merchandise categories, foods, fresh and other essentials have been very strong, despite out-of-stocks on some items throughout the quarter, such as toilet paper, paper towels, cleaning supplies, etc., meats and proteins toward the end of the quarter, hand sanitizers and the like,” he explained. “Office and majors were also strong during the quarter, driven by work-from-home initiatives, while most other discretionary categories were a little weaker during the quarter such as jewelry, luggage, third-party gift cards. Other weak categories, which include things like sporting goods, lawn and garden, patio and apparel, while they were weak, they’ve rebounded somewhat towards the end of the quarter.”
Costco’s overall e-commerce sales soared 64.5% (66.1% excluding forex) in the third quarter, well surpassing the 28% growth seen in the second quarter.
“Like many retailers out there, we saw an increasing level of strength in e-commerce sales over the last few months,” Galanti said in the call. “If I look at the three four-week periods that comprised our 12-week third quarter, roughly that 64.5% reported [growth] number in the first four weeks was in the 25% range and the next four weeks in the 50% range and the last four weeks in the 90% range.”
Strong departments for online sales included food and groceries, health and beauty aids, office supplies, majors, housewares and small electrics. “Total online grocery grew at an incredible rate during the third quarter, as I’m sure it did at many places,” Galanti said. Costco’s e-commerce comp sales figures exclude its Instacart same-day grocery delivery service.
“If we were to include that third-party in our e-commerce number, that mid-60% comp number would be slightly over 100%. So we’ve seen big strength in driving the business that way,” he noted. “Overall, our e-comm sites have worked pretty smoothly during the quarter, despite dramatic volume increases. As well, we were able to improve on delivery times throughout the quarter as we adjusted to the ramped-up order volumes.”
On the earnings side, reported net income for the third quarter came in at $838 million, or $1.89 per diluted share, compared with $906 million, or $2.05 per diluted share, a year ago. Costco said the bottom-line result includes $283 million in wage and sanitation costs, or 47 cents per diluted share (pretax), related to COVID-19. The prior-year quarter also reflected a $73 million (16 cents per share) benefit from a nonrecurring tax item.
Analysts, on average, had projected adjusted earnings per share of $1.92, with estimates ranging from a low of $1.56 to a high or $2.34, according to Zacks Investment Research.
“Regular hours resumed May 4, with an additional hour on weekday mornings for seniors and persons with disabilities. Warehouses are still following social distancing and sanitizing guidelines. Additionally, as discussed, some of our warehouse businesses — like hearing aids, optical, photo and, to a partial extent, food courts — were closed or mitigated during the majority of the quarter,” said Galanti. “Also, effective May 4, we now require all members and employees in the warehouses to wear masks. During the quarter, included in that big $283 million number, we spent about $32 million on masks, gloves and incremental cleaning and cleaning supplies and things like plexiglass partitions, you name it, all related to COVID.”
Going forward, some of those expenses will continue, he added. “We would expect the incremental expenses related to COVID to exceed $100 million in Q4 but be quite a bit lower than the $283 million that we had in Q3. We’ll have to just wait and see, though.”
Issaquah, Wash.-based Costco opened two clubs in the third quarter and five locations over the first three quarters.
“We expect in Q4 to open 10, including two relos [relocations], so a net of eight. It looks like our net total this year will be somewhere around 13,” Galanti told analysts. “There have been a few impacted by COVID-19 in terms of construction delays and have been pushed into the first part of fiscal 2021, which starts in early September.”
Costco now operates 787 warehouses, including 547 in the United States and Puerto Rico, 100 in Canada, 39 in Mexico, 29 in the United Kingdom, 26 in Japan, 16 in Korea, 13 in Taiwan, 12 in Australia, two in Spain, and one apiece in Iceland, France and China. The retailer has e-commerce sites in the U.S., Canada, the United Kingdom, Mexico, Korea, Taiwan, Japan and Australia.
Jefferies analyst Christopher Mandeville described Costco’s third quarter as mixed, with record fuel profits offset by coronavirus-related hits to sales and margins, notably in discretionary product categories.
“Costco is a traffic-led concept and a victim of its own success, not well-suited for the current environment nor potentially an economic downturn relative to peers, given unfavorable mix (including food-away-from-home exposure) and lack of an omnichannel offering,” he wrote in a research note on Friday.
E-commerce now accounts for about 8% of Costco’s sales, or 10% including Instacart-driven online grocery sales, according to Mandeville. “Despite the current environment and clear signs from nearly every other retailer that omnichannel efforts are additive, management remains steadfast on limiting its pickup services in favor of driving in-club traffic, which it believes leads to higher average tickets,” he wrote, “Separately, big-ticket delivery continues to be built out with Costco’s March 17 purchase of Innovel, a prior third-party delivery partner.”
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