Costco’s Results Came In Strong. Why the Stock Is Down.

Revenue came in at $78.9 billion, ahead of projections for $77.7 billion, in what Jefferies analyst Corey Tarlowe called a strong finish for fiscal 2023. 

Adjusted comparable-store sales growth came in at 3.8%, slightly above expectations for an increase of 3.5%.

The strong results came as the average ticket fell 3.9% worldwide and 4.5% in the U.S. this quarter, dragged down by weakness in big-ticket discretionary items as shoppers have been reluctant to splurge, said Richard Galanti, chief financial officer, on a call with investors. Food and sundries were the strongest category, he added.

Because Costco (ticker: COST) provides monthly sales updates, and had already reported numbers for 52 of the 53 weeks in its 2022-2023 fiscal year, the chances of a major surprise in terms of revenue were slim heading into the report, analysts said. Regardless, the sales beat was a welcome change from the past three fiscal quarters, which have seen the retailer’s revenue fall slightly short of estimates as consumers grow increasingly cautious.

The uptick in comparable-store sales is also a welcome change, given they have been in a bit of a slump lately. Comparable-store sales have decelerated steadily over the course of the past four quarters in what Evercore ISI analyst Greg Melich called “a year of the lowest comps since 2017” ahead of the report. Comparable-store sales rose by 14.9% in the quarter ending May 2022 but by that month this year, the gain was only 3.5%.

Costco also improved its margins this quarter. Gross margins improved 0.4 percentage points year-over-year to 10.6%. Notably, the company hasn’t noticed any significant increases in shrink—the industry term that encompasses theft and product damage—in contrast to its competitors, which have been sounding the alarm over a rise in organized retail crime.

Still, shares of Costco fell 1.6% in after-hours trading Tuesday. The stock closed 1% lower Tuesday, and has risen 21% this year.

Wall Street had been hoping the company would provide an update on a potential increase in membership fees—a move many on Wall Street believe is long overdue.

“It’s a question of when, not if,” Galanti said when an analyst on the call asked if a membership fee increase was part of the plan for the fiscal year.

Analysts point out that Costco has historically raised fees about once every five or six years. The latest increase was in 2017, but the company has held off on increasing rates to avoid alienating customers who have been struggling with higher costs for groceries. Costco currently charges $60 for a basic membership and $120 for an executive membership.

“It’s a little longer this time around since June of 17,” Galanti said. “So we’re six years into it, but you’ll see it happen at some point. We can’t really tell you if it’s in our plans or not. We’ll let you know when we know.”

Write to Sabrina Escobar at [email protected]