ii view: retailer Costco fails to inspire

Fourth-quarter results to 31 August  

• Total revenues up 8% to $86.16 billion
• Adjusted comparable sales up 6.4% year over year
• Adjusted earnings up 11% to $5.87 per share
• Dividend of $1.30 per share, unchanged from Q3 

ii round-up:

Costco Wholesale Corp (NASDAQ:COST) has detailed sales and profit that beat Wall Street forecasts, although with the members-only retailer outlining a second-quarter of slowing same store comparable sales. 

Total fourth-quarter revenues to late August rose 8% to $86.16 billion, helping push adjusted earnings up 11% to $5.87 per share. Adjusted comparable store sales growth of 6.4%, slowed from 8% in the third quarter and 9.1% in Q2.

Shares in the S&P 500 retailer fell by 1% in US trading having come into this latest news up by almost 5% over the last year. That’s similar to DIY retailer The Home Depot Inc (NYSE:HD). The S&P 500 index is up nearer to 15% over that time. 

Costco operators 914 warehouses globally, up from 905 in Q3, including 629 in the USA, 110 in Canada, 42 in Mexico, 29 across the UK and seven in China. 

Like fellow US retailers, Costco has been trying to navigate increased costs from Trump imposed trade tariffs. About a third of the group’s US sales come from imported goods.

Management measures to assist customers have included introducing its own alternative Kirkland labelled goods where branded items had been hit by the new import tariffs.

Customer paid memberships during the quarter rose 6.3% to 81 million with related revenues up 14% to $1.72 billion. E-commerce related sales increased 13.6% with top categories including housewares, tires and clothing. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the results. 

ii view:

Costco opened its first warehouse in Seattle in 1983. Today the retailing giant employs over 330,000 people across its stores globally. Headquartered in Issaquah, Washington on the West coast, its former HQ in Kirkland remains the name of its own branded label. Geographically, the US generated most sales during 2024 at 72%, with Canada at 13.7% and other combined international businesses the balance of almost 14%. 

For investors, trade tariffs being applied on goods imported from overseas such as toys could be hindering demand. An estimated forward price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap. Costs for businesses generally remain elevated, while the group’s e-commence operations lack the scale of rival Amazon.com Inc (NASDAQ:AMZN).

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To the upside, diversity of revenue streams includes both membership fees and product sales, with the group’s geographical footprint also extensive. Scope for overseas expansion persists, e-commerce sales are growing, while Costco’s membership model enables ongoing investment in competitive product pricing.    

For now, and despite ongoing risks, this value orientated retailer continues to justify its place in many diversified investor portfolios. 

Positives: 

• Product diversity
• Value orientated

Negatives:

• Intense competition
• Subject to currency moves

The average rating of stock market analysts:

Buy