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.”
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.
"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.”
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.