Costco Wholesale Corporation's (COST 0.32%) worst-selling category this year was one it has little control over: gasoline.
Cheap gas is a big draw for Costco members, as 472 of its 686 warehouse have an attached filling station. The warehouse retailer tends to charge $0.06 to $0.12 less for gasoline than competitors. Gas prices fell through the second half of 2014 and remained at post-recession lows this year, ranging from $2.00 to $2.80 on average across the country. Gas prices tend to increase in the warmer months due to increased demand and a more expensive fuel blend, but have returned to the $2.00 mark with the arrival of winter. For much of this year, gas was more than a dollar per gallon cheaper than it was in 2014.
Costco doesn't separate its results from gasoline sales. Rather, it includes it in its "ancillary" category, along with pharmacy, optical, and food court and other add-ons. That segment was the only one of Costco's six to lose share in the fiscal year ending August, falling from 17% to 16%.
Lower gas prices also have the notable effect of pushing Costco's margins higher as gasoline has a lower margin than the rest of Costco's merchandise. Gross margin rose 43 basis points in the quarter to 11.09%, and management credited "the impact of gasoline price deflation" for most of that improvement.
The decline in gasoline prices also affected Costco's sales growth, as its top line increased just 3%.
Other problematic areas
Lower gas prices weren't the only headwind Costco faced this year. In November, health officials found E. coli bacteria-linked chicken salad served by the warehouse retailer, and at least 19 people in seven states were infected with the bacteria, with five hospitalized. An investigation revealed that celery in the chicken salad was the likely culprit.
Unlike Chipotle Mexican Grill, whose stock plummeted after it was connected with dozens of E. coli cases, Costco stock was unaffected by the contamination scare. Prepared food makes up a small percentage of its overall sales, meaning food safety is a much bigger risk for restaurant chains like Chipotle than it is for a retailer like Costco.
A stronger dollar also caused headwinds for Costco, as sales at Canadian locations were down 3% last year and rose just 2% at the rest of its international territories. Currency-adjusted comparable sales were up 8% and 6% in those respective segments, indicating that the underlying businesses are solid.
Looking ahead to 2016, the year-over-year effects of currency translation and low gas prices should be muted compared to 2015, which will benefit Costco's results. Oil prices have fallen to a new low below $35 and the dollar is getting another boost after the Federal Reserve's decision to raise interest rates, but the year-over-year percentage changes are unlikely to be as strong as they were this year. Following a year where gasoline prices fell by about a third, they are unlikely to fall another third.
Therefore, Costco should see stronger profit growth in 2016, though competitive threats remain. An addition of 32 stores globally should also ensure continued growth, bringing its grand total above 700.
