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3 Takeaways From Costco's Q4 Results

By Demitri Kalogeropoulos – Sep 30, 2020 at 9:09AM

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The warehouse giant has strong momentum heading into a new fiscal year.

This is a great time to be a bulk retailer. Costco Wholesale (COST -1.91%) on Thursday announced that its sales and profit metrics saw a continued lift from coronavirus-related demand spikes across categories like fresh food and consumer electronics in its fiscal fourth quarter. The pandemic pressured customer traffic at stores through late August, but shoppers are spending much more per visit while supplementing those trips with frequent digital ordering.

That sales boost, plus Costco's strong membership metrics, imply solid returns for investors over the next fiscal year.

Growth details

Investors already knew that Costco grew comparable-store sales by 14% for the fiscal fourth quarter thanks to its practice of releasing monthly revenue updates. That result put it slightly ahead of Walmart's (WMT -0.65%) Sam's Club but behind smaller chains like BJ's Wholesale Club and Kroger through August.

An employee stocks fresh produce.

Image source: Getty Images.

The warehouse giant's report this week added context to that growth metric, which was mostly powered by a 13% increase in average spending per visit. Shopper traffic gains were weaker than they have been in recent quarters but stayed positive at 1.2%.

Costco's digital segment was a standout performer, just as it was for Walmart last quarter. Sales were up 91% in Q4, compared with Walmart's 97%. Executives said in a conference call with Wall Street analysts that this reported figure rises to 120% if you include its same-day grocery delivery sales that are fulfilled by a third party.

Membership updates

Shareholders have been looking forward to Costco's membership updates ever since executives said three months ago that consumer shifts related to the pandemic would start showing up in the Q4 report.

It's hard to see much actual impact from the shopping disruption, though. Subscribers renewed at about the same industry-leading 91% rate from the previous quarter. And membership fee income again grew at roughly 5% thanks to the combination of a growing base and higher penetration of Costco's premium subscription offering. These wins powered a sharp earnings increase as operating income jumped 32% to $1.9 billion.

Looking out to 2021

Costco says it is in a good inventory position, with only minor stocking issues around the Halloween and Christmas holidays. Its wide portfolio that spans staple grocery products along with discretionary purchases like TVs, vacations, and home appliances give it flexibility to adjust to the wide range of selling conditions that could develop over the next year. These scenarios include a major recession and further virus outbreaks.

The company should get a solid lift from new warehouse launches this fiscal year, which will be a busier period than last year due to several COVID-19 related delays. In the meantime, investors will be watching Costco's monthly sales figures for any sign that demand is slowing from its current double-digit pace. The next such update is set for Oct. 7 and will cover the sales month of September.

Costco will likely face stepped-up market share challenges in 2021 from peers like Kroger and BJ's Wholesale, which are each booking extra cash that they intend to direct toward securing a bigger piece of the retailing pie. But the warehouse giant is enjoying its own resource boom today, too, and is showing no sign of a drop in shopper loyalty as it enters a new fiscal year.

Demitri Kalogeropoulos owns shares of Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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