Costco (COST) Investors Stock Up On More Shares As Warehouse Retailer Tops Estimates Again
3:39 pm Friday, September 24th, 2021
In an environment rife with logistics and supply chain bottlenecks, unrelenting inflation, and component shortages, Costco (NASDAQ:COST) demonstrated once again why it’s the clear leader in the membership warehouse market. After the close yesterday, the company reported upside 4Q21 results that featured total adjusted comparable sales growth of 9.4% and pre-tax earnings growth of 23%. Solid execution, especially regarding order planning and inventory management, and COST’s ability to retain and expand its membership base in the wake of the pandemic are keys to its solid performance. Although margins are being squeezed, productivity gains have allowed the company to mitigate the erosion.
It was widely believed that COST’s growth would sharply decelerate as economies reopen and as the company laps unfavorable yr/yr comparisons. For instance, in the year-earlier quarter, COST posted impressive adjusted comparable sales growth of 14.1%. While the growth rate has dropped, it hasn’t fallen to the degree that many were anticipating. This indicates a significant stickiness to the new demand that was generated during the first months of the pandemic. Adding credence to that assertion is a steady increase in COST’s total cardholder count, which grew by 1.8 million from last quarter to 111.6 million. Rewinding to 2Q20, the quarter just before the pandemic began wreaking havoc, COST’s total cardholders totaled 100.9 million.
Not only is the company continually adding new members, but it’s also holding on to existing members at higher rates. In Q4, renewal rates in the U.S. and Canada edged higher by 0.3% from last year to 91.3%.
There’s another phenomenon at play that’s pushing the top line higher. Consumers are well aware of the supply chain disruptions and shortages that are causing product availability issues. As an example, CFO Richard Galanti commented during the earnings conference call that rollout times for some furniture has extended to 16-18 weeks from the more typical 8-12 week range. Once those items reach the store, they are selling rapidly because consumers don’t want to wait another few months to make a purchase. In some cases, general merchandise is completely sold out within two weeks, according to Galanti.
On the negative side, inflationary pressures have worsened. When COST reported Q2 results in March, Galanti estimated that inflation was running between 1.0-1.5%. Last quarter, he bumped that range up to 2.5-3.5%. Now, Galanti estimates overall price inflation on COST’s products to be in the 3.5-4.5% area.
