In the world of big-box stores, no box is bigger than the one received from Costco (COST 0.17%). The company has been consistently wowing customers and investors for years, but today, it hit a small bump. Costco's first fiscal-quarter profit suffered ever so slightly on a percentage of revenue basis; but overall, the business looked strong.
Costs cut into margins
Other media outlets have called out the slight increase in selling and general expenses that came in this quarter. In the first quarter of fiscal 2012, SG&A expenses accounted for 9.8% of revenue -- this year, it was 10%. The bulk of the negative shift came from an increase in benefits, workers' comp, and other related expenses.
Luckily, most of that shift was offset by a decrease in the percentage of revenue spent on merchandising, and when it came down to net income, the margin was effectively flat. The company is still seeing ongoing costs from a new IT platform, and that should continue throughout the year; but otherwise, things look good.
The bull case for Costco
Almost everything that was supposed to go up went up in the first quarter. Comparable sales grew, memberships grew, and total revenue grew. The company now makes two-thirds of its sales from its executive members, who receive additional cash back and some extra discounts along with other perks. Total memberships grew by 7% year over year, and Costco now has 72.5 million cardholders.
Those customers are dedicated shoppers, and their commitment to savings helped Costco increase overall sales by 5% year over year, without suffering too much of an impact -- a 0.02% drop -- in operating margin. Combined with the increase in comparable sales, Costco's quarter looked strong. It's something that companies like Target (TGT -0.70%) and Wal-Mart (WMT 1.32%) would love to have.
Target increased its sales by 4% last quarter, but it did so by cutting margin and spending more on selling. As a result, the company actually saw a 39.6% drop in operating income. Wal-Mart was better off and managed to increase overall revenue and operating margin, but comparable sales fell, as the company's stores suffered individually.
The final piece of the bull case comes from Costco's potential, especially online. Right now, online sales account for just 2.5% of total sales. Americans spend almost 6% of their retail cash online, according to the Census Bureau, meaning that Costco has a lot of potential to reach out to those millions of cardholders who only shop in the store.
If Costco can keep up its pace, keep adding members, and expand its physical base as it has been doing, there's no reason to think that 2014 will be anything other than a success. Investors looking for some broad exposure to retail should take a deeper dive into this business.
