Costco Wholesale ( COST -1.77% ) has been one of the biggest retail winners during the COVID-19 pandemic. Consumers have ramped up spending on groceries and home-related items, and Costco has won more than its share of that spending by capitalizing on its status as a one-stop shop and its huge base of loyal, high-income customers.
Costco's sales growth slowed a bit during December, compared to the previous few months. However, the warehouse club giant continues to expand its top line at a double-digit pace, highlighting its resilience.
Another strong month
Through the first two months of Costco's 2021 fiscal year -- September and October -- adjusted comparable sales (excluding fluctuations in gasoline prices and exchange rates) surged 16.8% year over year. Growth continued at a similar rate for the first three weeks of November, before slowing abruptly to a mid-single-digit pace during the week of Thanksgiving.
Costco's growth accelerated back into double-digit territory in December, but remained slower than the company's growth rate for the previous several months. Total sales rose 12.3% year over year to $19.14 billion, on a 10.9% increase in adjusted comparable sales.
Whereas Costco reported extremely consistent comparable sales growth across regions in the first three months of fiscal 2021, those trends diverged in December. In the U.S., adjusted comp sales growth slowed modestly to an 11% pace. Growth slowed even more abruptly in Canada, where Costco posted a 5.7% comp sales increase last month. By contrast, Costco's other international markets continued to shine in December, with adjusted comp sales surging 15.8% year over year.
Pandemic-related restrictions bite
During the company's monthly sales call, Costco executive David Sherwood reported that traffic declined 0.6% year over year in December: a slowdown from mid-single-digit growth in recent months. He noted that Canada, Mexico, and the U.K. (three of its largest international markets) imposed new shopping restrictions to combat the latest wave of the pandemic, weighing on traffic.
Some states and other local governments have imposed restrictions in the U.S., too. Traffic increased 1.3% in Costco's home market, but that also marked a significant slowdown compared to the previous few months.
In this context, Costco's 10.9% adjusted comp sales gain was quite impressive. December is typically the highest-traffic month of the year for retailers, magnifying the impact of capacity restrictions. Meanwhile, holiday-related shipping delays may have made it harder to satisfy demand through Costco's e-commerce business. The company reported that e-commerce sales rose 62.5% in December: down from 82% growth in the first three months of the fiscal year.
The future looks bright for Costco
In the near term, pandemic-related restrictions on retailers' capacity could continue to weigh on Costco's sales relative to a few months ago. Still, the restrictions will be less of a hindrance in the months ahead, when traffic is typically significantly lower than in November and December. Shipping delays should also ease going forward. Moreover, Costco's ability to deliver double-digit growth even in the face of shopping restrictions emphasizes how much the retailer's value proposition is resonating with customers.
With its strong member loyalty, favorable customer demographics, and low prices, Costco is well positioned to hold on to the market share gains it has made during the pandemic. Moreover, while customers may pull back on spending for some of Costco's key merchandise categories as the pandemic recedes and they start spending more on restaurants and vacations, other aspects of Costco's business will benefit from economic reopening. These include most of its ancillary business lines, such as gasoline, travel, food courts, and optical departments.
Costco stock doesn't come cheap these days. But even at around 37 times the company's projected earnings for fiscal 2021, it offers plenty of value, considering Costco's long-term growth potential.