Amid growth in its eCommerce sales and online selections, Costco Wholesale Corporation beat analysts’ estimates for earnings, but fell short on top-line revenues for the second quarter. The warehouse chain reported revenues of $35.4 billion and earnings of $2.01 per share compared to analysts’ estimates of $35.7 billion and $1.69 per share.
Costco CFO Richard A. Galanti said on the earnings call that reported-basis eCommerce sales increased by 20.2 percent during the quarter, and the chain saw a continued increase in eCommerce orders, sales, profits and other metrics. He noted the company also saw top growth in hardware, health and beauty aids, tire and automotive, toys, seasonal items, apparel, consumer electronics and groceries.
As the company passed the one-year anniversary of its grocery launch, “same-day grocery delivery is now available to members within a short drive of 99 percent of our U.S. locations,” according to Galanti. He also noted that two-day grocery delivery is available anywhere in the continental U.S. While still “small pieces” of the company’s business, Galanti said, “they’re growing nicely.”
When it comes to new brands and items online, Galanti said, “We’re now offering a much broader selection of Apple products, including the recent addition of MacBooks and iMacs.” He also noted the company plans to offer the first of several Sony-branded products. For buy-online-pick-up-in-store, Galanti said Costco has expanded its selection within categories such as handbags, electronics and jewelry. It also continues to experiment with pickup lockers in 10 locations. In addition, the company plans to begin eCommerce operations in Japan in early summer and in Australia in late summer or early fall.
For the quarter, Galanti said membership fee income came in at $768 million, up $52 million from a year ago (with a little more than $20 million related to the membership fee increases in June 2017 in the U.S. and Canada). He also noted that renewal rates in the U.S. and Canada were 90.7 percent, up from 90.5 percent at the end of the first quarter. The rate improved worldwide to 88.3 percent, up from 88 percent at the end of the first quarter.
The executive added that member households rose from 52.2 million at the end of the first quarter to 52.7 million at the end of the second quarter, while total cardholders increased from 95.4 million to 96.3 million over the same period.
In addition, Costco ended the second quarter with 20 million paid executive memberships, an increase of 341,000 or roughly 28,000 per week since the end of the first quarter. As Galanti pointed out, that figure includes the recent introduction of the company’s executive membership in Korea, “which is our fifth country offering executive membership.” In the second quarter, Korea contributed to a little more than half of the increases.
The Road Ahead
Costco also plans to take its starting wages from $14 and $14.50 per hour to $15 and $15.50 per hour in the U.S. and Canada. In terms of brick-and-mortar store counts, Galanti noted the opening of one new location in Coral Springs, Florida and the relocation of a Miami location. More recently, the company opened a store in Bayonne, New Jersey on Thursday (March 7). Costco also plans to open its 16th location in Korea in late April and its 11th location in Australia in early May. There is a big expansion period planned for the fourth quarter, with a net opening of 12 units and two relocations. Galanti added that the second quarter’s warehouse space ended at 112 million square feet.
Costco also plans to allocate more capital resources to expanding and supporting its operations. It has a chicken plant under construction in Nebraska and plans to start initial processing and production later this year. Galanti also noted the company has started a fulfillment automation operation. “This is for small packages for eCommerce, and we plan to do two more of those this year at other depots,” he said. Two-day grocery delivery started in October one-and-a-half years ago in roughly 10 business centers, and the company is working to move those operations to six depots during the next several months.
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