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Costco: Double-Digit Growth Continues in May

By Adam Levine-Weinberg - Jun 8, 2021 at 10:20AM

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The warehouse club giant is showing investors that its strong sales growth last year was no fluke.

A month ago, Costco Wholesale (COST -1.41%) reported that its adjusted comparable sales soared more than 24% in April. The leading warehouse club operator faced a much tougher year-over-year comparison in May. Nevertheless, Costco delivered another month of double-digit comp sales growth, highlighting the company's tremendous momentum.

Another spectacular month

For May, Costco's adjusted comparable sales -- excluding the effects of gasoline price inflation and foreign currency fluctuations -- rose 14.7%. On an unadjusted basis, comp sales jumped 22.8%, and total sales grew 24.2% to $15.59 billion. Traffic increased more than 18%, as consumers have become willing to visit stores more frequently after receiving their COVID-19 vaccinations.

Management noted that the timing of Memorial Day boosted Costco's sales growth by between 2 and 2.5 percentage points last month. Still, even without that tailwind, Costco would have posted a double-digit comp sales gain.

This strong growth was particularly impressive because Costco recorded a 9.7% adjusted comp sales gain in May 2020. By contrast, comp sales had declined slightly in April 2020, giving the retail giant an easy year-over-year comparison.

Growth throughout the store

As in April, Costco's ancillary businesses recorded the strongest sales gains. Ancillary sales surged more than 80% in May, led by gasoline, Costco's food courts, and the optical and hearing aid departments. This was no surprise: A year ago, stay-at-home orders had crushed gasoline demand, the optical and hearing aid departments were closed, and Costco was offering limited service at its food courts.

The entrance to a Costco warehouse.

Image source: Costco Wholesale.

That said, Costco also recorded solid growth in all of its core departments. Non-food sales continued to lead the way, with strong demand for home furnishings, jewelry, and apparel driving mid- to high-teens comp sales growth. Importantly, fresh foods accelerated back to double-digit growth in May, suggesting that Costco's 2020 market share gains in that category will stick.

Don't worry about the e-commerce slowdown

Interestingly, Costco's e-commerce growth slowed dramatically last month. Adjusted e-commerce comparable sales rose just 8.7%, trailing the company's overall growth rate. As recently as February, Costco was reporting e-commerce comp sales growth in the 90% range.

Given that the company is still posting extremely strong sales numbers overall, investors shouldn't be concerned about slowing e-commerce growth. Unlike most retailers, Costco charges higher prices online than in its warehouses for most items. Thus, it would be natural for consumers who have started visiting Costco's warehouses more frequently in recent months to shift spending from to in-person shopping.

No sign of slowing momentum

Last month, Costco reported that earnings per share jumped 46% in the third quarter of fiscal 2021, driven by the company's strong sales growth and easing pandemic-related cost pressures. This excellent result helped allay investor concerns about Costco's profitability, after EPS inched up just 2% in the second quarter. Indeed, the analyst consensus now calls for Costco's adjusted EPS to rise 21% this year, followed by 8% growth in fiscal 2022.

Costco could beat those estimates easily if it keeps growing sales at an elevated rate. Strong sales growth will enable it to reduce operating expenses as a percentage of sales, particularly because the company ended its $2 per hour pandemic-era premium pay a few months ago. Additionally, higher turnover in the fresh foods department is reducing spoilage, thereby lifting gross margin.

While Costco stock may look a bit pricey at 33 times forward earnings, the company's excellent growth prospects should make it a winner for long-term investors.

Adam Levine-Weinberg owns shares of Costco Wholesale. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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