Costco doesn't raise membership fees, says $1.50 price for hot dogs is safe

By Tomi Kilgore and Claudia Assis

Profit and sales beat expectations, with a 21% jump in e-commerce sales boosted by gold and silver, but stock pulls back from record high

Costco Wholesale Corp. reported fiscal third-quarter profit, revenue and same-store sales that all beat Wall Street forecasts, but shares of the membership-based warehouse retailer pulled back from a record high amid some disappointment that membership fees weren't increased.

The company also noted that consumers were feeling the benefit of prices holding steady for another quarter.

"As inflation has leveled off, our members are returning to purchasing more discretionary items," said Chief Financial Officer Gary Millerchip, according to an AlphaSense transcript. Growth in the category was led by toys, tires, lawn and garden and health and beauty aids."

He also chimed in on recent reports regarding the rising price of hot dogs: "Oh, and to clear up some recent media speculation, I also want to confirm the $1.50 hot dog price is safe."

The stock (COST) fell 2.3% in morning trading Friday, after closing Thursday at a record $815.34.

D.A. Davidson analyst Michael Baker said some on Wall Street may be disappointed, as yet another quarter passes without a fee increase.

"But, we see [Costco] management's point...if the model is working so well now, why do it," Baker wrote in a note to clients.

Historically, Costco raises fees every five to six years, but the last hike occurred seven years ago. Millerchip said it was still a matter of "when we increase the fee rather than if we increase the fee." And while inflation and risks of a recession remain a concern, he feels "really good" about current renewal rates.

The company ended the quarter with 74.5 million paid members, up 7.8% from a year ago. The renewal rate for members was 90.5%, including 93.0% in the U.S. and Canada. Membership fee revenue grew 7.6% to $1.12 billion.

"But we're still evaluating those considerations to determine what the right timing is," Millerchip said. "And when we reach that point where we feel it is the right time, of course, we'll be very open and direct in communicating that."

Stifel Nicolaus' Mark Astrachan said the fact that a fee increase hasn't been announced yet is a sign of management's "confidence" that above-average profit growth can be sustained.

Regarding inflation, Millerchip said it was essentially flat, the same as the previous quarter. He said fresh foods inflation was "close to zero," while "slight" inflation in food and sundries was offset by "some deflation" in nonfoods, led by hardware, sporting goods and furniture.

Earlier this month, fellow discount retailer Walmart Inc. (WMT), which also has a membership-based retail chain Sam's Club, also said inflation wasn't much of a factor in sales growth, and that it saw deflation in the general merchandise category.

But Walmart noted then that it was still seeing more spending on nondiscretionary items, while Costco was seeing improvement in discretionary spending, and gaining market share from its competitors in big ticket items, such as electronics and appliances, and swing sets.

"[W]e see big and bulky going very well," said Chief Executive Ron Vachris. "It's been a year of our $1,200 swing set that we have on the floor. We can't get enough. They're just blowing out."

For the quarter to May 12, net income rose to $1.68 billion, or $3.78 a share, from $1.30 billion, or $2.93 a share, in the same period a year ago. That beat the FactSet consensus for earnings per share of $3.70.

Total revenue grew 9.1% to $58.52 billion, above the FactSet consensus of $58.02 billion, as net sales increased 9.1% to $57.39 billion. Membership fee revenue was 1.9% of total revenue, the same as last year.

Comparable sales, or sales from stores open at least a year, rose 6.6% to beat the FactSet consensus of 6% growth. That marked the biggest increase since it rose 6.8% during 2023's fiscal second quarter, and the 11th straight quarter that growth beat expectations.

E-commerce sales jumped 20.7% from a year ago, led by sales of gold and silver bullion, gift cards and appliances.

In the U.S., same-store sales increased 6.2%, better than the FactSet consensus of a 5.6% rise, with traffic up 5.5% and the comparable ticket up 0.7%.

Same-store sales rose 7.7% in both Canada and in other international markets.

Costco shares have rallied 20.7% so far this year, compared with a 22.5% surge in Walmart's stock, a gain of 5.5% for the Consumer Staples Select Sector SPDR ETF XLP and the S&P 500 index's SPX 10% advance.

-Tomi Kilgore -Claudia Assis

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05-31-24 0956ET

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