Following their fiscal Q3* earnings release May 26th, Costco continued regaining some of the stock value they lost in mid-May, as they surpassed market expectations and showcased a strong position amid inflationary pressures. Where their competitors’ recent earnings results showed significant margin pressures and slowing growth, Costco displayed a well-managed bottom-line and steady growth on the top-line. Their model is proving resistant to inflation as customers continue to choose and trust their value proposition.
*Note: Costco’s fiscal year runs from September to August, making their fiscal Q3 (March to mid-May), comparable to other retailers’ Q1.
Harvest Group has made significant expansions in the past couple years, opening an office serving Target in Minneapolis, Minnesota, and building a team to serve our clients at Amazon. On June 1st, we announced an expansion to serve clients at Costco with the hire of Shan Case. Read more here.
Harvest Group Takeaways for Suppliers
- Costco continues to show strength well above the rest of market. They saw broad based strength across all metrics and sales categories. Costco’s strategy continues to withstand the stressors in the market, as evidenced by sustained growth in 2 key metrics: membership and traffic (see below). We believe in the long-term success of Costco and their proven value proposition for customers. Suppliers should expect Costco to remain strong.
- Membership: overall membership count was up 10.4% this quarter. Memberships are at an all-time high, as are member renewal rates. Executive memberships now account for more than 43% of their member base and 71% of worldwide sales. Membership growth is central to Costco’s strategy, which is why 2 they announced they will not raise the price of their membership fee this quarter. Customers are finding significant value in Costco’s offerings with inflation, so Costco will do all they can to preserve value for existing members and attract new customers.
- Traffic was up 5.6%, lapping strong numbers last year and continuing 8 consecutive quarters of traffic growth. Costco lost less traffic than other retailers during the height of the pandemic and quickly began gaining traffic over prepandemic quarters as customers turned to them for value and big stock-up trips. Customers have not stopped doing so with the return of “going-out” behaviors, instead visiting stores more than ever
- Costco is passing some price increases through to the customer, while being slow to increase in certain categories to maintain their low prices and value proposition. Costco’s gross margin was lower than normal at 10.19% (they typically keep it at 11-13%) because they are sacrificing margin to maintain value for their members. Even when they have accepted cost increases, we have seen them resist passing it on to members by raising retail. They are willing to take a hit to their margin to keep a strong value proposition during inflation, retaining existing members and attracting new ones. Their strategy expects volume from higher member sales to offset lower margin in the long run. During the Q&A portion of the call, leadership indicated they do not expect their margin position to change in the next quarter as inflationary pressures continue to rise.
- Costco’s eCommerce sales grew 7.9% in the quarter. Costco’s eCommerce strategy looks different from those of their competitors, but Costco’s digital sales are continuing to grow and have been less volatile than some of their competitors. Their eCommerce efforts are focused on their 3-pronged delivery strategy – same-day, 2-day, and Fresh/Frozen. Costco has also been expanding their digital advertising opportunities for suppliers to use marketing to increase visibility to their brand and products on Costco.com. Costco has significant opportunity for growth in this space, and suppliers should stay focused on growing with Costco as they expand further into the world of digital sales and advertising.
Download to get the full Costco earnings report from Harvest Group here: