Rapid online growth bulks up Costco’s profits
Rapid growth in e-commerce sales helped Costco beat Wall Street expectations in the annual earnings it reported Wednesday.
Seattle Times business reporter
Costco Wholesale has been a bit stodgy when it comes to the Internet — but its e-commerce sales boomed this year, helping it beat Wall Street expectations when it posted year-end results Wednesday.
Online sales represent only 3 percent of Costco’s $110.2 billion in sales for the fiscal year ended in August, or about $3.3 billion.
Nordstrom, by comparison, relies on the Web for more than 15 percent of its retail sales.
The pace of Costco’s online growth surpassed that of the giant warehouse stores: Sales online rose 18 to 19 percent for both the fourth quarter and the fiscal year, versus fourth-quarter sales growth of 6 percent for the company as a whole.
Online sales are more lucrative, too, said Chief Financial Officer Richard Galanti in a conference call with investors. That boost helped pad Costco’s margins, leading to a surprise rise in earnings when most analysts expected the year to end on a down note.
“E-commerce is definitely quite a bit more profitable than the rest of the company. And so 3 percent of sales implies a greater percent increase of earnings,” Galanti said.
The results underscore how the surging tide of online shopping is making ripples even in the finances of Costco, whose business model primarily consists of luring fee-paying members into cavernous warehouses with rock-bottom discounts on everything from ground beef to coffins.
Costco’s official Twitter handle has no tweets. Its Facebook page has 1.2 million likes, versus Walmart’s 34.7 million.
As more people, especially younger shoppers, flock online, experts have pondered how Costco can compete with the likes of Amazon.com, especially as retailers experiment with same-day delivery.
“We’re not going to be the guy that drops off fruity pebbles cereal and a quart of milk before your kid wakes up in the morning for breakfast if you ordered it before 10 p.m. the night before,” Galanti told analysts.
Nonetheless, the Internet can help strengthen Costco’s role as a wholesale supplier, he said, pointing to the success of a partnership with Google Express that offers same-day or overnight delivery of Costco products in the San Francisco Bay Area, Los Angeles and Manhattan.
That partnership has attracted new members. Ultimately, Costco wants to get them into a warehouse, “and we think there’s avenues to do that,” Galanti said.
The company also in September launched a nationwide promotion on the LivingSocial deals website, seeking to draw in younger, Internet-attuned shoppers. The offer “worked well,” Galanti said.
Another item that helped bolster Costco’s profit margins — and perhaps its cool factor among younger shoppers — is organic products, which hit around $3 billion in sales for the year. Organic ground-beef sales were “up dramatically,” Galanti said.
Right now Costco Online operates in the U.S., Canada, the U.K. and Mexico, and the company plans to add two countries before the end of 2015.
Joseph Agnese, an equity analyst with S&P Capital IQ, said the market has been watching Costco’s online advances to make sure the company’s “got it,” and that the recent moves are a sign that it is indeed keeping its “eyes on the ball.”
Costco’s nemesis, Wal-Mart Stores, announced Tuesday it is cutting health-insurance coverage for thousands of part-time employees, the latest of many retailers to do so amid rising health costs.
Galanti said that while U.S. health-care costs have risen, the company wasn’t changing its benefits policy, which covers part-timers.
“We haven’t and aren’t going to make major changes like cutting a bunch of people out of it,” Galanti said.
Shares of Costco were up $3.46 or 2.8 percent, to $128.73 at the end of regular trading Wednesday, after Costco posted net income of $697 million, or $1.58 per share, for its fourth fiscal quarter, versus $1.40 per share last year.
For the year, net income rose to $2.06 billion, or $4.65 per share, up from $4.63 per share last year.
Analysts had expected the company to post quarterly profit of $1.52 per share and annual earnings of $4.60 per share.
The quarterly-earnings beat is a nice change for investors, as the company had missed analyst expectations the past four quarters.
Annual sales rose to $110.21 billion, up 7 percent, also surpassing estimates of $105.16 billion. Sales in the fourth quarter were $35.52 billion.
Sales for stores open at least a year were up 4 percent. Excluding the impact of lower gasoline prices and the strengthening of the U.S. dollar on foreign operations, they rose 6 percent.
Membership fees, which underpin Costco’s business model, were $2.42 billion for the fiscal year ended Aug. 31, up from $2.28 billion for the previous year.
Cowen analyst Faye Landes wrote in a note that the earnings beat resulted from “very strong gross margin performance, which is especially impressive given the competitive pressure on pricing within the industry.”