🌭Franks and Finances: Savoring the Long-Term Gains of Investing in Costco
When I think of Costco, the first thing that comes to mind is their $1.50 hotdogs. The co-founder Craig Jelinek even threatened the ex-CEO Jim Senegal if he tried to raise the price of hotdogs. Costco has always made it clear that their company motto is customers and employees take priority, even before shareholders.
As of 3/19/2024, Costco ($COST) closed at $732.17, but reached an all time high of $787.08 before their Q2 FY 24 earnings report. Let’s break down what happened!
In this article, we are going to:
→ Analyze Costco’s Q2 FY24 earnings report
→ Project performance for the rest of FY24 and further into the future
★ FY24 Q2 Earnings
Despite reaching an all time high before their earnings report came out, Costco’s stock price dropped by almost 8% the very next day. Some would say that this was a classic run up before earnings and then a “selling of the news.”
Their performance for the second quarter was the following:
Earnings per share (EPS): $3.92 vs. $3.62 expected
Revenue: $58.44 billion vs. $59.16 billion expected
The market did not like Costco missing revenue expectations, but when you take a deeper dive, things are still looking healthy and positive.
How can EPS beat expecations while revenue was down?
EPS beating expecations while not meeting revenue expectations means profit margins were up for the quarter. While Costco made less money, they were able to be more efficient and manage their costs. Costco was even able to lower the prices of their merchandise, which is what helped them with garner more foot traffic. You have to remember, Costco prioritizes their customers and employees first.
The earnings call actually highlights how Costco doesn’t have the supply chain issues they had like last year with non-foods items. Higher profit margins are achieved when you manage your expenses. It’s clear that the company was able to manage costs better this quarter, despite the drop in revenue.
How did Costco’s memberships fare?
Membership revenue was up 8% this quarter. This increase was from new member sign-ups, upgrades to Executive Membership, and a boosted renewal rate. These benefits can be attributed to Costco’s membership sharing crackdown, just like Netflix’s crackdown on shared accounts. Not only that, Costco was able to lower costs for their merchandise. This allowed shopping at their locations more attractive than at other big box stores.
🛒E-Commerce
Costco has also put a big focus on their e-commerce. This quarter, they’ve seen an 18% increase in e-commerce sales. As Costco continues to improve their process with e-commerce, they will certaintly see more benefits from this addition. E-commerce purchases are catered to home renovations, jewelry, and consumer electronics. An increase in e-commerce indicates consumers have more discrentionary income they are willing to spend. This can potentially mean more splurging as the year progresses.
★ What does the future hold?
Costco intends to open a total of 15 new locations during the remainder of FY 2024. This most likely explains the drop in cash that they hold from quarter 1 and quarter 2 of FY 2024.
There are two key things to keep an eye on for the next half year:
🌭Continued Growth
With the success and consistency Costco has been able to uphold all these years, I don’t believe they would build more locations without being fully confident that there is demand to meet their supply. A higher emphasis on e-commerce with same day delivery coupled with competitive pricing on products is an enticing duo of reasons for consumers to shop at Costco. Cracking down on shared membership cards will also catalyze more membership signups as we go further into the year.
Costco saw more foot traffic in their 2nd quarter, and giving customers a reason to come back with their pricing not only goes back perfectly to their mantra of “customer first,” but it’s also a great retention tactic. The telling sign that Costco will continue to perform well is going to be their revenue and margin numbers as the company expands and sees more demand.
🌭Annual Membership Fee
These actions are a great segway into their expected membership price increase. Costco has usually increased its annual fee about every five and a half years. Management stated that “it’s when, not if.” This is probably the biggest factor I will be looking out for in the remainder of 2024. A higher annual membership fee will likely provide a big boost to revenues.
These are exciting times for the wholesale retail giant, and I will definitely keep adding into my Costco position as well as my running annual hot dog consumption tally.