Costco maintains sales momentum in third quarter
In its third quarter of fiscal 2022, Costco Wholesale delivered double-digit net and comparable sales growth to more than 20% from a year ago.
For the 12 weeks ended May 8, net sales totaled $51.61 billion, up 16.3% from $44.38 billion a year earlier, Costco reported yesterday after the close of the market. Model sales jumped 14.9% overall (+10.8% excluding fuel and foreign exchange), including increases of 16.6% in the United States (+10.7% excluding fuel and foreign exchange), 15.2% in Canada (+12.8% excluding fuel and foreign exchange) and 5.7% internationally (+9.1% excluding fuel and foreign exchange).
The fiscal 2021 quarter, also 12 weeks, saw net sales increase by 21.7% and overall mock-up sales by 20.6% (+15.1% excluding fuel and FX), with mock-up sales in up 18.2% in the United States (+15.2% excluding fuel and FX) .
“In terms of third quarter compensation metrics, traffic or purchase frequency increased 6.8% globally and 5.6% in the US. Our average transaction increased 7.6% worldwide and 10.4% in the United States in the quarter,” said Bob Nelson, senior vice president of finance. and investor relations at Costco, analysts said on a conference call Thursday night.
Delivery service Costco Grocery generated low double-digit growth in matching sales in the third quarter. (Image courtesy of Costco)
Changes in exchange rates negatively impacted scale model sales by just over 1%, while gasoline price inflation accounted for an increase in sales of just over 5% of fuel during the third quarter, Nelson reported.
“The best performing categories in the third quarter were Candy, Sundries, Tires, Toys, Jewelry, Newsstand, Home Furnishings, Apparel, Bakery and Delicatessen. strong performers were liquor, office, sporting goods and hardware, all of which were quite strong a year ago,” he said. “In terms of sales from other businesses, the best performers came from gas, travel, food courts, and our business centers. So overall our sales were up nicely in the quarter and for the most part were pretty broad.”
Inflation continued to rise during the third quarter as pressures from rising commodity prices, rising wages, rising transportation costs and supply chain disruptions are ” still in play,” according to Nelson.
“For the first quarter, we estimate that price inflation was in the range of 4.5% to 5%. For the second quarter, we had estimated 6%, if you will. And for the third quarter, and talking to our traders, the estimated price inflation was around 7%,” he explained. “However, we saw a slight drop in fresh food inflation in the third quarter compared to the second quarter of the prior year, as we began to increase meat prices.We believe that our strong sales increases and relatively consistent margins show that we have continued to strike the right balance in passing on rising costs.
Costco generated further e-commerce growth in Q3 2022, with like-for-like digital sales up 7.4% (+7.9% excluding currency) on a jump of 41.2% (+38, 2% excluding currency) during the period of the previous year.
“The strongest departments in the quarter were Special Orders, Patio and Garden, Jewelry and Home Furnishings,” Nelson said of e-commerce sales. “Our largest e-comm merchandise department, which includes consumer electronics, appliances, televisions, grew slightly better than average single-digit on a very strong sales increase a year earlier. And Costco Grocery, including our Third-Party, Dry, Fresh and Frozen Two-Day Delivery, continues to grow, up double digits in the quarter.
Costco’s membership fee revenue in the third quarter increased 9.2% year over year (10.4% excluding currency) to $984 million, or 1.91% of sales. The global renewal rate increased slightly by 0.4% from the end of the second quarter to reach 90% in the third quarter, reflecting a rate of 92.3% in the United States and Canada. Year-over-year, total membership grew just over 6% to 64.4 million paying households.
“Historically, we have increased fees every five to six years, with the last three increases averaging around 5.5 years, and our last increase in June 2017. As we approach that 5.5 year period , there will be more discussions with Craig [Jelinek, CEO]Ron [Vachris, president and COO] and the management team. But for today, we don’t have anything more specific to report in terms of timing,” Nelson said on the call. “Furthermore, given the current macroeconomic environment, historically high inflation and the burden it places on our members and all consumers in general, we believe that increasing our membership fees today ‘today before our usual schedule is not the right time.”
Ultimately, third-quarter net income attributable to Costco was $1.35 billion, or $3.04 per diluted share, compared to $1.22 billion, or $2.75 per diluted share, it a year ago. Costco noted that the 2022 quarter included a one-time pretax charge of $77 million (13 cents per diluted share) for additional benefits provided under a new employee agreement effective March 14.
Analysts had on average expected adjusted earnings per share of $3.03, with estimates ranging from $2.80 to $3.38, according to Refinitiv.
“In the third quarter, we opened a new net warehouse and two moves. Year-to-date in the third quarter, we have opened 17 warehouses, including three relocations, for a network of 14 new warehouses so far this fiscal year,” Nelson told analysts. “In the fourth quarter, we expect to open 10 additional new warehouses, which will put us at 27 for the year, including three relocations, for a net of 24 new warehouses for the whole of fiscal year 2022. The 24 new warehouses per market are 14 in the United States, two in Canada and one in Korea, Japan, Australia, Mexico, Spain, France, China and our first opening in New Zealand, which will take place in August of This year.
“In terms of new openings this year, that’s four less than what we had expected in the second quarter,” he added. “Two of the four were affected by supply chain issues related to electrical equipment, and the other two were delayed due to third-party site development issues. All four buildings are now expected to open by the end of November.
Issaquah, Wash.-based Costco currently operates 830 total warehouse clubs, up from 809 a year ago. By market, the retailer operates 574 clubs in the United States and Puerto Rico, 105 in Canada, 40 in Mexico, 30 in Japan, 29 in the United Kingdom, 16 in Korea, 14 in Taiwan, 13 in Australia, four in Spain , two each in France and China, and one in Iceland. Costco also operates e-commerce sites in the United States, Canada, United Kingdom, Mexico, Korea, Taiwan, Japan, and Australia.