Costco's Earnings Soar, Driven by Robust Sales of Precious Metals

Costco Wholesale Corporation (COST) once again delivered a strong financial performance, bolstered by impressive sales of gold bars, silver, and competitively priced everyday essentials at its warehouses.

The wholesale club reported adjusted earnings per share (EPS) of $3.92, significantly surpassing analyst estimates of $3.62. Revenue reached $58.44 billion, marking a 5.7% year-over-year increase. However, it fell slightly short of the expected $59.04 billion, according to Bloomberg data. Significantly, same-store sales, excluding gas and foreign exchange fluctuations, soared by 5.8%.

In the United States, Costco's same-store sales growth exceeded expectations, coming in at 4.8%. The Canadian market also outperformed estimates, with a robust 9% increase in same-store sales. International stores demonstrated a higher-than-anticipated 8.2% rise in same-store sales.

Costco's Chief Financial Officer, Richard Galanti, attributed the strong performance, in part, to the demand for precious metals and appliances, driving digital sales to grow more than 18% compared to the previous year.

Membership fees, a crucial revenue stream for Costco, totaled $1.11 billion, up from $1.03 billion a year ago and also higher than the $1.08 billion reported in the first quarter. A Costco Gold Star membership costs $60 per year, while an Executive Membership is priced at $120. Last year, some analysts predicted that Costco would raise its membership fees this summer.

Despite the strong earnings, Costco's shares pulled back 4.6% in pre-market trading on Friday, as Wall Street viewed the stock as fairly valued at current levels. Citi analyst Paul Lejuez noted in a client note, "The quarter was strong, but it's hard to see the catalyst for the next leg higher at the current valuation. COST is very well positioned to continue to take share, but considering its high multiple (29.0x 2024E EV/EBITDA) and crowded positioning keeps us Neutral on the stock. We view the risk/reward as balanced at current levels."

Costco's shares have gained about 55% over the past year, outperforming the S&P 500's 29% increase.

Earnings Rundown:

Here are the key figures Costco reported in its fiscal second quarter compared to Wall Street estimates, according to Bloomberg data:

• Net sales: $58.44 billion versus $59.04 billion expected
• Adjusted EPS: $3.92 versus $3.62 expected
• Same-store sales growth: 5.8% versus 4.65% expected
  • US same-store sales growth: 4.8% versus 4.09% expected
  • Canada same-store sales growth: 9% versus 6.31% expected
  • Other international: 8.2% versus 6.17% expected

Other Highlights:

• Costco's US customer traffic rose 4.3% in the quarter.
• The company opened its sixth store in China during the quarter, located in Shenzhen. One more opening is planned in China this year as part of a bid to open 30 new locations worldwide.
• Costco is venturing into the sushi business. According to Galanti, "We recently opened our first fully operated sushi offering in Issaquah, Washington, across the street from our headquarters, with two more planned to open in the very near future. This operation is what we have successfully done for years — for many years, and throughout our Asia Costcos and several countries over there. The sushi program has proven to be a category where we can be successful in both quality and price, and we're looking forward to seeing more of that in the future."

Costco's strong financial performance underscores its ability to capitalize on consumer demand for both essential goods and high-value items like precious metals. The company's competitive pricing strategy and warehouse-friendly approach have resonated with customers, driving increased traffic and sales across various product categories.

The robust sales of gold bars and silver, along with appliances, highlight Costco's diverse product offerings and its ability to cater to a wide range of consumer preferences. As the economy continues to navigate uncertain times, consumers appear to be seeking value and quality, two attributes that Costco consistently delivers.

Membership fees, a significant contributor to Costco's revenue stream, experienced healthy growth, reflecting the company's ability to retain and attract new members. The potential for a membership fee increase, as speculated by analysts last year, could further bolster this revenue source in the future.

While Costco's share price experienced a pullback in pre-market trading, analysts remain optimistic about the company's long-term prospects. The stock's valuation, while elevated, reflects the market's confidence in Costco's ability to continue gaining market share and delivering strong financial results.

As the company expands its footprint, with new store openings in China and globally, it positions itself to capture a larger share of the lucrative wholesale club market. The foray into the sushi business showcases Costco's willingness to explore new product categories and cater to evolving consumer preferences.

In the face of economic uncertainties and changing consumer behaviors, Costco's commitment to providing value, quality, and a diverse range of products has proven to be a winning formula. The company's ability to adapt and innovate, coupled with its strong financial performance, positions it well for continued success in the competitive retail landscape.

As consumers navigate inflationary pressures and seek value for their money, Costco's warehouse concept and membership-based model offer a compelling proposition. The company's focus on delivering essential goods at competitive prices, while also offering high-value items like precious metals and appliances, resonates with customers across various income levels.

Looking ahead, Costco's strategic expansion plans, coupled with its robust financial performance, position the company as a formidable force in the retail sector. While navigating the evolving consumer landscape and economic challenges, Costco's ability to anticipate and respond to customer needs will be crucial in maintaining its competitive edge and driving long-term growth.