Costco (NASDAQ:COST) beat earnings with positive numbers all around, except for its stock price on the day. Even with earnings rising 19% from a year ago, revenue up 8%, and revenue from stores open at least one year up 5%, the stock fell nearly 1%. Of course, a daily stock move shouldn't worry long-term investors. And sometimes more important than the raw numbers is what's hidden in the earnings call.
Here's what you need to know from Costco's recent earnings call.
CFO Richard Galanti discusses the increasing expansion: "Between now and September 1, the end of our fiscal year, we expect to open an additional nine locations, three in the U.S., three in Japan, and one each in the U.K., Taiwan, and Australia, such that we'll most likely end the fiscal year with 28 new openings for the year. That's up from 16 net openings in fiscal 2012."
Of Costco's 627 stores, 449 are in the United States. This presents a huge opportunity in countries where it is just getting started, like Australia, where it only has three stores. And for Costco, where stores perform better as they get older due to building up the local membership roll, the sooner it builds them, the better off its future will be.
Continued long-term management
Next, Galanti discusses Costco's pride in falling margins:
The four core categories -- food and sundries, hardlines, softlines, and fresh foods -- each showed lower year over year gross margin percents as we continue to invest in price, both in our domestic and in our international operations. And as I've stated before, this is Costco playing offense. It's driving sales, member shopping frequency, member signups and renewals, and market share.
Like Amazon.com, Costco isn't afraid to take a lower profit today to build a sustainable future business. This customer-centric thinking is a sign that management's attitude continues to follow founder James Sinegal's values even after his departure from the company. As The New York Times summed up in a profile on Sinegal, "At Costco, one of Mr. Sinegal's cardinal rules is that no branded item can be marked up by more than 14 percent, and no private-label item by more than 15 percent." Because of this, loyalty to Costco remains high, with membership renewal rates hovering around 90%.
The important fact from the conference call that Galanti notes:
In terms of Costco Online, we currently operate Costco e-commerce activities in the U.S., Canada, and more recently in the U.K. For the third quarter, sales and profits were up nicely over the last year. Third-quarter e-commerce sales were up over 20%.
While many may think Costco's oversize product line doesn't lend itself well to shipping and e-commerce, the sales figures show otherwise. And for Costco, online sales allow it to grow revenue with little physical investment compared to building a new store. Efforts to improve its online presence are paying off with this 20% sales growth, and a recent survey by market research firm Vividence puts Costco Online fourth for retailers best at displaying products and prices. While a majority of sales will always be in-store, online sales can grow to offer a nice boost to Costco's bottom line.