There was plenty to like when Costco Wholesale Corporation (COST 1.04%) reported its third-quarter financial results. Even in a tough environment for traditional retailers, Costco was able to deliver growth that largely beat the expectations of investors.
Revenue grew 12% year over year to $32.36 billion, exceeding analysts' consensus estimates of $31.84 billion. Costco outperformed in other metrics as well, with operating income that jumped 10% compared to the prior-year quarter, producing diluted earnings per share of $1.70, above analysts' expectations of $1.69 per share.
The company's financial release provided all the standard accounting metrics, but Costco's management supplied additional details that provided much greater insight during the conference call with analysts to discuss the just-completed quarter. Here's what Costco executives had to say about e-commerce, tax reform, and wages.
Image source: Costco.
E-commerce growth
In the earnings release, Costco reported that comparable online sales were up nearly 36.8% year over year, and 35.5% excluding the impact of foreign currency. Even more impressive was that online sales were up 43.1% year over year for the four weeks in April, which shows that these sales are accelerating.
Costco's Chief Financial Officer Richard Galanti said the company currently had about 10,000 products available for online shoppers, and it was continuing to hone the list of items that most resonated with customers. He pointed out that the company is becoming more effective in terms of site traffic conversion and that "more people are actually -- are looking at it, opening their emails, and transacting."
Galanti also said that approximately half the customers that order items for in-store pickup "will come in and shop as well before they pick up the item." This shows the success Costco is enjoying by using the omni-channel approach.
Tax reform
The U.S. tax reform that was signed into law late last year was the subject of endless debate -- particularly with regard to how companies would use this windfall. While Costco has previously provided some broad guidelines on its plans for the money, its strategy is now becoming much clearer.
Costco revealed last quarter that it didn't expect any major changes to its capital allocation plan. The company now says that it has identified three ways it plans to invest its tax savings. The first will be to "benefit our U.S. employees in the form of pay increases" (more on this in a moment). Second, the company has been and plans to continue to "invest some of the savings to drive our business," and specifically mentioned "investing in price as well as other activities." Finally, the company said that some of those savings would "go straight to the bottom line." This shows that Costco is taking a measured approach to benefit customers and employees, while still focusing on increasing sales.
Employee wages
On the subject of wages, Costco laid out a plan to increase the hourly wage rates that it pays employees by stating, "Effective June 11, our U.S. starting wages will increase from $13.00 and $13.50 an hour to $14.00 and $14.50 an hour, so $1.00 an hour for entry level, with all other hourly warehouse employees receiving an hourly increase anywhere from $0.25 to $0.50 per hour."
Galanti said that the estimated annualized cost of the wage increases would benefit about 130,000 of the company's U.S. employees, and cost Costco between $110 million and $120 million in pre-tax dollars. He also said it was "the right thing to do...to help out employees...we feel pretty good about what we've done."
Full spped ahead at Costco
Each of these discussions show that things are business as usual at Costco. The company continues to focus on ways to increase sales, better engage customers, and share the wealth with employees. This formula has been extremely successful in the past, and there's no reason to think that it won't continue for the foreseeable future.
