Costco’s July Sales Grow Strong but Miss Estimates Due to Fewer Store Visits and Currency Fluctuations
Costco (NASDAQ:COST) recently reported its July sales results and missed analysts’ estimates for the first time in the last five months. [1] The retailer’s comparable sales increased by 5% during the month, while the market expected the metric to increase by 6%. However, excluding the impact of lower gasoline prices and foreign currency fluctuations, Costco’s comparable sales growth was in line with the consensus estimate. Overall, the company’s net sales grew by 9% to $8.55 billion and its comparable sales increased by 5% in the U.S. and 7% abroad. [2]
Amid an uncertain economic environment in the U.S., the warehouse shopping model has become very popular among buyers looking for cost-saving deals. Being the strongest warehouse retailer in the U.S., Costco has been customers’ first choice, which is evident from its growing member base. For several quarters now, the company has registered a rise in its membership renewal rates and new membership signups.
While Costco’s July growth was driven by the continued adoption of warehouse shopping model, a decline in store traffic across the industry had a marginally negative impact. During July, some buyers preferred Internet shopping over store shopping, which had a notable negative impact on the industry-wide store traffic. Yet, the surge in online orders resulted in better-than-expected retail sales growth across the market. Sales of eight retailers tracked by Thomson Reuters increased by 4.4%, which was slightly ahead of the expected 4.2% growth. [1] Since Costco’s online channel isn’t too big, its store traffic decline would have easily overpowered a strong surge in online revenues.
Our price estimate for Costco stands at $123, implying a premium of less than 5% to the market price.
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Rise Is Membership Base Is Driving Comparable Sales
Historically, Costco has generated the bulk of its comparable sales growth from an increase in number of members, which appears to be the case in July as well. While the company does not provide details related to its member base on monthly basis, we will consider the increase in number of members from Q3 fiscal 2013 (the quarter that ended before July 2013) to Q3 fiscal 2014, as an indicator for the rise in member base for July 2014. As of May 11 2014, Costco had about 74.6 million cardholders, while it had only 69.9 million cardholders in the quarter ending on May 12 2013. [3] Making a conservative assumption that the number of cardholders from May to July increased by a similar amount during both the years, we conclude that July 2014 had 4.7 million more cardholders that July 2013. Also, membership renewal rates in North America and worldwide were 90.6% and 87.3%, respectively, at the end of Q3 fiscal 2014, up from 89.9% and 86.4% respectively, in the same quarter last year. [4] [5]
Slump in Store Visits Might have had a Marginally Negative Impact
Due to increased proliferation of smartphones and tablets, and the convenience of web shopping, U.S. buyers have been making more purchases online. Subsequently, they are visiting fewer stores, which is troubling a number of retailers who do not have a sizable online presence. As per the data compiled by ShopperTrak, a firm that tracks store traffic in over 40,000 outlets across the U.S., store visits have fallen consistently by close to 5% year-over-year in all the months of the past two years. This trend continued in July as 5% fewer shoppers went out for shopping, which impacted the sales of retailers such as Costco and Wal-Mart (NYSE:WMT) who rely on store sales for a bulk of their revenues. [1] It must be noted that even though Costco’s online sales might have increased considerably, its web channel isn’t big enough to have a noticeable impact on sales growth. Also, July is traditionally a clearance month in which retailers discount their products to make room for back-to-school inventory. Costco might have also done the same, which would have resulted in a marginal slowdown in its sales growth.
Although Costco could not meet market expectations in July, we believe that the consensus estimate was a little optimistic. Moreover, foreign currency fluctuations had a negative impact of a whole percentage point on the company’s comparable sales growth. Considering this, we conclude that Costco hasn’t lost any growth momentum in July despite the unfavorable environment.
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Notes:- Gap, L Brands Drive July Retail Sales, The Wall Street Journal, Aug 7 2014 [↩] [↩] [↩]
- Costco Wholesale Corporation Reports July Sales Results, Costco, Aug 7 2014 [↩]
- Costco’s SEC filings [↩]
- Costco Q3 fiscal 2014 earnings transcript, May 29 2014 [↩]
- Costco’s Q3 fiscal 2013 earnings transcript, May 30 2013 [↩]