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Costco finishes fiscal 2020 on high note

Online grocery helps drive 91% e-commerce sales growth in Q4

Russell Redman

September 25, 2020

5 Min Read
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Costco saw net sales rise 12.5% in the fourth quarter, with comparable sales up 11% in the U.S. Fiscal 2020 sales rose 9.3%, including a comp-sales gain of 8.1% in the U.S.Costco

Costco Wholesale surged past Wall Street’s high-end earnings estimates for the fiscal 2020 fourth quarter and full year, closing out the period with double-digit net and comparable sales gains.

For the 16-week fourth quarter ended Aug. 30, net sales climbed 12.5% to $52.28 billion from $46.45 billion a year earlier, Costco reported after yesterday’s market close. Overall comp sales rose 11.4% (14.1% adjusted, excluding fuel and foreign exchange), reflecting increases of 11% in the United States (13.6% adjusted), 9.1% in Canada (12.6% adjusted) and 16.1% internationally (18.8% adjusted).

“Traffic or shopping frequency on a worldwide basis was down 1.2% during the fourth quarter and showed an increase of 1.2% in the U.S. Our average transaction or average basket size was up 12.7% during the fourth quarter, notwithstanding the negative impacts from gas deflation and FX, which were included in that number,” Chief Financial Officer Richard Galanti told analysts in a conference call late Thursday.

“We’ve kept you up to date in our monthly sales calls on the impacts from the pandemic as we’ve been able to identify those,” he said. “Overall merchandise sales in the core — core being food and sundries, hardlines, softlines and fresh, as well as pharmacy — have all been strong, while sales in our other ancillary and travel businesses, though now open, have been soft.”

Related:Costco reports double-digit sales growth for August, Q4

Margins for core merchandise categories grew 70 basis points year over year. “Fresh foods was the biggest driver here,” Galanti said. “With the strong sales in fresh, we benefited from efficiency gains in both labor productivity and significantly lower — what we call D&D, or damage and destroyed — product spoilage. Food and sundries, softlines, hardlines, and I mentioned fresh foods already, all had higher margins year over year in the quarter as well.”

On a comparable basis, e-commerce sales jumped 90.6% in the quarter and were up 91.3% excluding the impact of foreign exchange. 

“Our e-commerce sales, as you’ve seen each month, have increased nicely,” Galanti said in the call. “A few of the stronger departments there are health and beauty aids, food and sundries, appliances, TVs, computers and tablets, housewares and small electrics. 

Richard_Galanti-Costco_CFO-headshot.jpg"We were able to improve our delivery times throughout the quarter as we adjusted to the ramped-up order volumes," Costco Chief Financial Officer Richard Galanti told analysts. (Photo courtesy of Costco)

“Total online grocery grew at a very strong rate in Q4, several hundred percent,” he continued, noting that gain excludes Instacart same-day grocery delivery. “If we included third-party same-day [delivery], our e-commerce comp result would have been up approximately 120% during the quarter. Overall, our e-commerce sites were relatively smoothly during the quarter, despite the dramatic volume increases, and we were able to improve our delivery times throughout the quarter as we adjusted to the ramped-up order volumes.”

Related:Costco rolls out Instacart same-day delivery across Canada

Costco’s online business, excluding Instacart, has risen to 8% of sales from 5% a year ago, Galanti reported. But his comments during the call indicated that in-store remains the favored channel, according to Jefferies analyst Christopher Mandeville.

“While e-commerce is gross profit accretive, the channel is gross margin dilutive, partly due to mix, with electronics being largest e-commerce category at high-single-digit gross margin,” Mandeville wrote in a research note late Thursday. “E-commerce rings are two times club, which is likely helped by strong, big-ticket discretionary items sold through the company’s delivery channel, now enhanced by Innovel. While management is happy with Instacart, the company favors in-store traffic over BOPIS [buy online pickup in store], despite peer commentary suggesting baskets could be bigger through this channel as well. We wonder if Costco is letting others figure out omnichannel before eventually embracing.”

At the bottom line, Costco’s fourth-quarter net earnings came in at $1.39 billion, or $3.13 per diluted share, compared with $1.1 billion, or $2.47 per diluted share, a year ago. Negatively impacting net income were COVID-19 premium wage and sanitation costs of $281 million pretax (47 cents per diluted share) and a $36 million pretax charge (6 cents) from prepayment of $1.5 billion in debt, partially offset by an $84 million pretax benefit (15 cents) for the partial reversal of a reserve of $123 million pretax (22 cents), related to a product tax assessment taken in the fiscal 2019 quarter.

Analysts, on average, had forecast adjusted earnings per share of $2.83, with estimates ranging from a low of $2.58 to a high of $3.03, according to Refinitiv/Thomson Reuters.

For the full 2020 fiscal year, Costco said net sales totaled $163.22 billion, up 9.3% from $149.35 billion in fiscal 2019. Comp sales grew 7.7% overall (9.2% adjusted, excluding fuel and forex), including gains of 8.1% in the United States (9.2% adjusted), 5% in Canada (7.4% adjusted) and 8.9% internationally (11.2% adjusted). E-commerce sales rose 49.5% (50.1% excluding forex) for the year on a comparable basis.

Fiscal 2020 net income was $4 billion, or $9.02 per diluted share, versus $3.66 billion, or $8.26 per diluted share, in 2019. Analysts’ consensus estimate was for adjusted EPS of $8.60, with projections running from a low of $8.30 to a high of $8.90, according to Refinitiv/Thomson Reuters.

During the fourth quarter, Costco opened eight net new clubs, giving the Issaquah, Wash.-based retailer a net gain of 13 for the full fiscal year.

“In terms of warehouse expansion, with COVID, we had some delays in some of the planned openings for the fiscal year that just ended Aug. 30, and a few of those have been pushed into the year that we're in now,” Galanti said in the call. “For the [2020 fiscal] year, we opened 16 total units, including three relocations. So we opened a net increase of 13 locations. Our plans for this year are to open about 20 net [new clubs], 23 including three relocations. That’s our best guess and plan at this point.”

Currently, Costco operates 795 warehouses, including 552 in the U.S. and Puerto Rico, 101 in Canada, 39 in Mexico, 29 in the United Kingdom, 27 in Japan, 16 in Korea, 13 in Taiwan, 12 in Australia, three in Spain, and one apiece in Iceland, France and China. The warehouse club chain also operates e-commerce websites in the U.S., Canada, the U.K., Mexico, Korea, Taiwan, Japan and Australia.

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About the Author

Russell Redman

Senior Editor
Supermarket News

Russell Redman has served as senior editor at Supermarket News since April 2018, his second tour with the publication. In his current role, he handles daily news coverage for the SN website and contributes news and features for the print magazine, as well as participates in special projects, podcasts and webinars and attends industry events. Russ joined SN from Racher Press Inc.’s Chain Drug Review and Mass Market Retailers magazines, where he served as desk/online editor for more than nine years, covering the food/drug/mass retail sector. 

Russell Redman’s more than 30 years of experience in journalism span a range of editorial manager, editor, reporter/writer and digital roles at a variety of publications and websites covering a breadth of industries, including retailing, pharmacy/health care, IT, digital home, financial technology, financial services, real estate/commercial property, pro audio/video and film. He started his career in 1989 as a local news reporter and editor, covering community news and politics in Long Island, N.Y. His background also includes an earlier stint at Supermarket News as center store editor and then financial editor in the mid-1990s. Russ holds a B.A. in journalism (minor in political science) from Hofstra University, where he also earned a certificate in digital/social media marketing in November 2016.

Russell Redman’s experience:

Supermarket News - Informa
Senior Editor 
April 2018 - present

Chain Drug Review/Mass Market Retailers - Racher Press
Desk/Online Editor 
Sept. 2008 - March 2018

CRN magazine - CMP Media
Managing Editor
May 2000 - June 2007

Bank Systems & Technology - Miller Freeman
Executive Editor/Managing Editor
Dec. 1996 - May 2000

Supermarket News - Fairchild Publications
Financial Editor/Associate Editor
April 1995 - Dec. 1996 

Shopping Centers Today Magazine - ICSC 
Desk Editor/Assistant Editor
Dec. 1992 - April 1995

Testa Communications
Assistant Editor/Contributing Editor (Music & Sound Retailer, Post, Producer, Sound & Communications and DJ Times magazines)
Jan. 1991 - Dec. 1992 

American Banker/Bond Buyer
Copy Editor
Oct. 1990 - Jan. 1991 

This Week newspaper - Chanry Communications
Reporter/Editor
May 1989 - July 1990

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