It's been a tough couple of weeks on Wall Street, and the downward pressure on stocks continued Friday morning. With investors worldwide still reeling from the Federal Reserve's increasingly stubborn emphasis on fighting inflation even at the cost of economic growth, market indexes have seen the bear market worsen. As of 9 a.m. ET, stock index futures on the Dow Jones Industrial Average (^DJI 0.82%), S&P 500 (^GSPC 0.59%), and Nasdaq Composite (^IXIC 0.55%) were down between 1% and 1.5%, starting to approach levels seen during the extreme bearishness that prevailed in June.
Consumer activity makes up much of the U.S. economy, and among retailers, Costco Wholesale (COST 0.59%) has managed to survive all sorts of economic conditions. The warehouse retail giant reported financial results late Thursday that showed its resiliency, but even some of the pressures that Costco is facing raised fears about whether other companies would be able to survive increasingly difficult conditions in the retail industry and beyond.
How Costco fared
Shares of Costco were down about 2% in premarket trading, which wasn't that far from the declines in the broader market. The company concluded its 2022 fiscal year on Aug. 28, and its financial results from the period included a combination of good news and signs of more difficult conditions ahead.
Overall, it'd be hard for investors to complain much about how Costco did financially over the past year. Revenue rose 16% to $222.7 billion. Net income came in at $5.84 billion, up 17% year over year and producing earnings of $13.14 per share. Even after adjusting for the upward impact of gasoline prices on overall revenue, comparable store sales rose 10.6% across the company, including 10.4% increases both in U.S. store sales and in the e-commerce channel overall.
Costco has continued to expand its store footprint worldwide. You can now find Costco stores in a dozen countries across the globe, as well as e-commerce sites serving eight different markets in North America, Europe, Eastern Asia, and Australia.
However, Costco's income statement showed that even it has had to pay higher costs for the goods it sells. Merchandise costs were up nearly 17% from year-earlier levels, causing gross margins to fall slightly. Given that Costco already gets by on razor-thin margins, the warehouse retail giant has little margin of safety for them to get any thinner.
Battening down the hatches
Costco is somewhat less exposed to margin pressures, though, because it has a ready source of high-margin revenue. The membership fees Costco charges its customers make up a considerable portion of the overall profit the company generates.
Many have speculated that Costco could boost those membership fees in the near future, especially given that it's been five years since the company last increased what it charges members. Rival Sam's Club, owned by Walmart, announced a fee increase for its members recently, marking the first boost in nine years.
Yet Costco CFO Richard Galanti indicated that the company doesn't have any specific plans for a fee increase currently. Galanti pointed to Costco's gas stations and other ancillary business segments as contributing enough margin to provide for some leeway elsewhere.
Keeping membership fees constant going into a recession could be a smart move for customer retention. Shoppers need Costco's low prices more than ever, but paying up for the privilege wouldn't be the best image for the warehouse retailer to project.
Fortunately for Costco, it's in a position to survive eroding margins from higher costs. For many retailers, though, it'll be a lot tougher to manage, especially if consumers have to deal with recessionary economic conditions weighing on their wallets.