Costco's Sales Rise, Despite Trading-Down Trends

Costco reported a 1.9% increase in its third-quarter sales and profits that beat analysts’ expectations. But the results demonstrated that even middle- and upper-income shoppers are making different decisions to keep household budgets in check.

For the third quarter of its fiscal year, Costco’s sales reached $52.6 billion, up from $51.61 billion last year. On a comparable sales basis, quarterly sales slipped 0.1% in the U.S. and 1% in Canada while rising 4.1% internationally. And ecommerce sales declined by 10%.

Net income for the quarter eased to $1.3 billion, down from $1.35 billion in the third quarter of last year.

But industry observers believe Costco is one of the few retailers that can prosper, even if economic trends become more dire.

Those results beat Wall Street expectations, despite the weakness in sales of bigger ticket items.

Peter Benedict, who follows the company for Baird, points to plenty of evidence that consumers are recalibrating their spending, including a 17% decline in big-ticket purchases, a preference for chicken and pork over pricier beef, and gains in sales of Kirkland items, Costco’s private label, “speaking to a more choiceful consumer.”

That resulted in a 3.5% decrease in average ticket size.

“Costco remains well positioned to navigate the choppy macro environment that likely lies ahead,” he writes in his note on Costco’s results.

“With a besotted member base, low-frills warehouses, and growth opportunities at home and abroad, we expect Costco’s durable competitive advantages to lead to consistent, strong performance despite retail’s upheaval,” writes Zain Akbari, who follows the company for Morningstar.

His note on the results acknowledges stepped-up pressures on the warehouse club, from Amazon scaling its food offerings to brick-and-mortar retailers improving their omnichannel offers. Still, members remain fiercely loyal through many changes, including the recession of 2008, membership rate increases, and the onslaught of Amazon Prime and COVID.

Renewal rates remain at record highs, at 93% in the U.S. and Canada and 91% globally.

“We believe the values that Costco offers, driven by cost leverage, procurement strength, and top-class store efficiency should allow it to keep traffic high," writes Akbari. "With ample opportunity to expand globally, we expect Costco to post consistently strong returns even as it grows.”

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