Competition in grocery pressures Costco's margins
Costco on Thursday reported that first quarter net sales rose 10.3% to $34.31 billion, from $31.12 billion in the year-ago quarter. E-commerce rose 32.3% (26.2% adjusted), according to a company press release. Overall company comps, not including e-commerce, rose 8.8% (7.5% adjusted). U.S. store comps rose 11% (or 8.3% adjusted for fuel and currency variations and an accounting change), and Canadian comps rose 2.4% (5.5% adjusted). The company's stock plunged 17% in mid-morning trading.
The wholesaler said year-over-year margins were down in fresh food where the company is facing more competition from conventional stores like Walmart's Sam's Club and conventional grocery operations. "We've seen little bit more margin pressure as there's been a little bit more retail competitive pressure out there, not only from supermarkets, but Sam's as well, but that's part of the business," Richard Galanti, Costco's CFO, told analysts on Thursday, according to a conference call transcript from Seeking Alpha.
Income for the quarter reached $767 million from $640 million a year ago, the company also said. The average front end transaction rose 3.7% during the quarter, or 2.4% adjusted.
As Costco moves more assertively into e-commerce, the company is capturing more customers from areas not near its store, and the margins are more or less holding up, Galanti said on Thursday.
In comments emailed to Retail Dive, Moody's Investors Service Lead Retail Analyst Charlie O'Shea said the quarter's results "reflect the company's prudent strategy of short-term investments for long-term benefit."
"Sales growth is moving at an impressive clip, liquidity is robust, and Costco continues to validate its position as one of the world's top performing retailers," he also said.
Galanti dismissed the grocery competition "not only from supermarkets but Sam's" as simply "part of the business." In addition, he said that Instacart, which Costco partners with, appears to not be having a major impact siphoning off shoppers from its brick-and-mortar locations.
"We feel that we’re seeing less than we originally thought, which wasn’t lot to begin with in terms of does it take away from the frequency in the store. It can’t add to it," he said. "But it has opened some new markets for us or some expanded markets."
The warehouse retailer is garnering more members at home and abroad as well. The renewal rate in North America hit 90.5% from 90.4% 12 weeks earlier at Q2 end, as the worldwide rate rose to 88% from 87.9%, according to Galanti.
Costco partook of consumers' high-spending holiday mood, achieving "all kinds of records for orders and sales during the Black Friday through Cyber Monday weekend," he said, with strong sales in grocery, consumer electronics, hardware, automotive, and health and beauty aids. Website refinements also helped drive sales of furniture, domestics and housewares, he said.
The company is keeping a watch on tariffs, with no real downside yet because it stocked up before they kick in next month, and now has more time to stock up further because planned increases have been pushed ahead several weeks, he also said.
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