Costco Wholesale reported solid fiscal 2024 second-quarter results after Thursday’s closing bell, but the stock fell in extended trading due to a slight miss on sales and margins. Given their recent run-up, we would expect that pressure on shares to continue Friday. However, the quarter wasn’t thesis-changing to the powerful Costco business model that excels in all seasons. Total revenue for the quarter ended Feb. 18 increased 5.7% year-over-year, to $58.44 billion, missing analysts’ expectations of $59.16 billion, according to estimates compiled by LSEG. Earnings per share (EPS) grew 18.8% year-over-year, to $3.92, beating analysts’ forecasts of $3.62, LSEG estimates showed. EPS was positively impacted by a 21-cent tax benefit due to the deductibility of the $15-per-share special cash dividend received by the company’s 401(k) participants. Even when backing this out, it was still a solid beat. COST YTD mountain Costco YTD Costco shares fell roughly 4% in after-hours trading following Thursday’s record high close of $785.59 each. We don’t see that pullback as an indictment of the quarter, which fell victim to expectations simply getting a little ahead of themselves. The stock has rallied 19% year to date ahead of Friday’s trading — far outpacing the broader retail cohort. Bottom line If you drill down on the quarter, there is nothing that alters our bullish view of the stock. Costco’s leadership in selling quality goods at value prices led to market share gains and membership growth at a high renewal rate. Sure, someone out there may be disappointed because the elusive membership fee increase catalyst still hasn’t hit. That’s fine. But what piqued our interest on the post-earnings conference call was hearing management explain its interest in increasing its presence in the retail media and advertising market. This has been a huge profit-boosting opportunity for fellow Club name Amazon and Walmart . Costco would likely give back some of those ad dollars back to its customers in the form of savings, but we’re sure some would pad its bottom line. We are increasing our price target to $800 per share from $770. But, considering the new PT is only slightly higher than the stock’s regular session record close Thursday, we are keeping our 2 rating, meaning we would wait for a bigger pullback before buying up more shares. The stock’s recent rally has stretched its multiple to historic highs, and we would not be surprised to see the stock take some time to digest its recent gains. Quarterly commentary Costco’s reported fiscal Q2 gross margins — excluding membership fees, which flow directly into profits — increased 8 basis points from last year, to 10.8%. On his final post-earnings call before retirement, Costco CFO Richard Galanti broke down all the levers of quarterly margin performance. Core merchandise was a 5-basis-point improvement on a reported basis, and a 2-basis-point improvement, excluding the fall in the price of gasoline from the year-ago period. Costco saw a small margin headwind from sales of fresh food while food and sundries, and nonfoods provided a positive contribution to margins. Nonfoods has been benefitting from less markdowns and less supply chain challenges. Costco’s ancillary and other businesses — including gas stations, pharmacies, food courts, travel and hearing aid centers — provided a 7-basis-point improvement on a reported basis and a 6-basis-point improvement excluding gas deflation. Costco’s 2% reward program was a 7-basis-point headwind to margins on a reported basis and excluding gas deflation basis, a result of more sales to Costco’s executive members. Last in, first out (LIFO) inventory accounting was a 3-basis-point benefit on both sides. This was due to a $14 million LIFO credit in the quarter, compared to no charge last year. Costco’s self-reported inflation update was encouraging. After experiencing inflation of about 0% to 1% in its fiscal first quarter, Galanti said inflation in fiscal Q2 was essentially flat, and the company is reducing prices where it can. Remember, Costco prides itself on being the last retailer to raise prices and the first to lower them. With inflation finally making its way down to flat, there was a thought in the market that management would finally increase its membership fee. The company historically increased its fees every 66 months, and it has been 84 months and counting since the last one. Costco has delayed increasing its fees because it didn’t want customers to get hurt twice – from higher inflation and also membership costs. Now that inflation has flatlined, the market is looking for Costco to make a move. (It’s worth noting that another catalyst investors had been awaiting for a while happened last quarter when Costco announced the special dividend.) However, once again Galanti reiterated that the next membership fee hike is still a “when, not if” situation. We frequently write about membership fees because when Costco chooses to raise them, the benefits will likely be two-fold. Some of those extra dollars will flow directly to the bottom line, meaning higher profits. But the bulk of that money will likely be reinvested in the business to keep prices down, thereby increasing traffic and market share as the flywheel goes on and on. Costco is a volume company, not a margin company. When Costco eventually decides to increase its membership fee, we expect it will find little resistance from its club members. Its renewal rate in the U.S. and Canada just ticked up to 92.9% while worldwide stayed consistent at 90.5%. Costco continues to expand its footprint at a steady rate. Management plans to open a net 28 new locations this fiscal year. In January the company opened its sixth warehouse in China and management estimated it had 10,000 people at the opening. They love Costco over there. February Results In addition to reporting its second-quarter results ended February 18th, Costco provided February monthly sales for the period ended March 3rd. On an adjusted basis, which excludes the impacts from changes in gas prices and foreign exchange, total company comparable sales increased 5.6%, with U.S. comps up 4.1%. That’s an acceleration from the prior period when comps grew 3.4% on total company basis and 2.2% in the U.S. By category, food was up mid-single digits, fresh food increased high single digits, and nonfoods was positive in the mid-single digits. (Jim Cramer’s Charitable Trust is long COST, AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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A Costco Wholesale warehouse sign is seen outside a store in Silver Spring, Maryland, on Aug. 5, 2023.
Mandel Ngan | Afp | Getty Images
Costco Wholesale reported solid fiscal 2024 second-quarter results after Thursday’s closing bell, but the stock fell in extended trading due to a slight miss on sales and margins. Given their recent run-up, we would expect that pressure on shares to continue Friday. However, the quarter wasn’t thesis-changing to the powerful Costco business model that excels in all seasons.
