To The Moon

Costco reported third quarter fiscal 2023 results, with total revenue up 1.9% to $52.596 billion, missing market expectations of $54.66 billion. $Costco(COST)$ 

I. Financial Analysis: Revenues up slightly on sluggish results, net income down

In terms of revenue, Costco's Q3 total revenue was $53.648 billion, up 1.9% year-over-year, but less than the $54.66 billion expected by the market. Specifically in terms of revenue components, Q3 net sales were $52.604 billion, up 1.9% year-over-year; membership fees were $1.044 billion, up 6.1% year-over-year.

For specific sales, Costco same-store sales increased 0.3 percent in Q3, with same-store sales in the U.S. down 0.1 percent; same-store sales in Canada down 1.0 percent; and same-store sales in other international regions up 4.1 percent. E-commerce sales declined 10.0 percent.

Clearly, total revenue growth in the quarter was driven primarily by higher membership fee revenue, while merchandise sales were more subdued by the macro environment and struggled to perform well. In particular, a significant decline in e-commerce sales weighed on overall sales growth.

In terms of profit, Costco Q3 net income was $1.302 billion, down 3.8% year-over-year; diluted earnings per share was $2.93, compared with $3.04 a year earlier, a performance that was also below market expectations. From the specific data found in the case of a small increase in revenue, driven by unfavorable factors such as rising raw material costs, cost expenditures rose even more, ultimately resulting in Q3 operating profit and net income fell year-on-year. This is also a scene that is particularly prone to appear in the earnings reports announced by large supermarkets at present.

Second, the operational analysis: the rise in costs and expenses dragged down profits, membership income grew steadily

1. Cost control

Costs of Costco are mainly based on the cost of goods, sales, general administration and management expenses, etc. Given the nature of supermarkets, the cost of goods is the largest part of the expenses.

Specifically, Costco's cost of goods in Q3 was NT$47.175 billion and selling, general and administrative expenses were NT$4.794 billion, for a total of NT$51.969 billion, compared to NT$50.805 billion in the same period last year, an increase of 2.3%. As mentioned earlier, the impact of high inflation continues, with rising upstream costs causing Costco to spend more.

As costs rose more than revenue, Costco's operating profit in Q3 was $1.679 billion, down 6.25% year-over-year. Even though Costco's performance in interest and other income was slightly higher than the same period last year, net income ended up declining year-over-year.

2. membership revenue

As the pioneer of the membership supermarket chain, Costco has made it possible for customers to buy good quality products at low prices in the supermarket through strict cost control and category selection in multiple stages. This is the code of Costco's business, people basically do not rely on the sale of goods to make money, earn is the membership fee.

Costco's Q3 membership fees were a healthy $1.044 billion, up 6.1% year-over-year. Membership revenue has always been a winning formula for Costco to survive economic cycles, and even in the face of high inflation, Costco still has the ability to raise membership fees. In Costco's official statement, Costco will choose the right time to raise membership fees in a subsequent bad environment, which will not have a significant impact on renewal or enrollment rates.

3. Compare to Walmart

Walmart, the leading retailer, reported earnings a while ago, reporting first quarter revenue of $152.3 billion, up 7.6% year-over-year and exceeding previous market estimates of $148.76 billion. Net income attributable to Walmart was $1.673 billion, down 18.5% year-over-year. The company also raised its full-year guidance for 2023 in the report.

Although Costco's revenue growth was sluggish compared to Walmart's results, it was more stable in terms of profit thanks to the fact that Costco's profit stream is mainly contributed by membership fees.

Although Walmart's Sam's is following a similar model to Costco, Sam's only accounts for a small portion of Walmart's revenue.

Technical Inventory

Although Costco's stock price has been consolidating at a high level in these years due to the epidemic and macroeconomic pressure, the amplitude is shrinking during this period from the trend.

In the long run, Costco as a well-known consumer blue chip, unique business model has created a stable performance development, annual K to rise mostly, there is a good allocation value.

IV. Personal summary

1. Costco's performance this quarter is relatively sluggish, the overall increase in revenue does not increase profits, the key data is less than expected, mainly inflation brought about by rising costs to further reduce profits, which is also the main problem facing the supermarket industry.

2. Although facing the impact of future economic uncertainty, but Costco relies on a unique business model, the authority in the membership fee position can effectively help the company's operation against the risk, which is other large supermarkets do not have the advantage.

3. Costco's stock price is still in consolidation stage, although the short-term will be affected by the future economic uncertainty of the United States, but its stable performance, long-term is still a worthy allocation of the underlying.

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