Costco Wholesale Corp (COST) Q4 2024 Earnings Transcript Highlights: Strong e-commerce…

• Net income: $2.354 billion, or $5.29 per diluted share, compared to $2.16 billion and $4.86 per diluted share last year.

• Net sales: $78.2 billion, up 1% from $77.4 billion last year.

• Comparable Sales: USA growth by 5.3%, Canada growth by 5.5%, international market growth by 5.7%, total company growth by 5.4%.

• E-commerce sales: An increase of 18.9%, or 19.5% after taking into account exchange rate differences.

• Income from membership fees: $1.512 billion, up 0.2% year over year.

• Renewal prices: USA and Canada – 92.9%, worldwide – 90.5%.

• Gross margin: 11%, an increase of 40 basis points year over year.

• SG&A rate: 9.04%, an increase of 8 basis points year over year.

• Interest costs: $49 million, up from $56 million last year.

• Interest income: $138 million, up from $201 million last year.

• Tax rate: 24.4%, compared to 27.1% last year.

• New warehouses: In the fourth quarter, 14 new warehouses were opened.

• Investment expenditure: $1.58 billion in the fourth quarter, total expenses for the year $4.71 billion.

• Paid household members: 76.2 million, an increase of 7.3% year-on-year.

• Executive Memberships: 35.4 million, an increase of 9.6% year-on-year.

Release date: September 26, 2024

For a complete transcript of the earnings call, please see Full Earnings Call Transcript.

Positive points

• Costco Wholesale Corp (NASDAQ:COST) reported a 9% year-over-year increase in net income for the fourth quarter of fiscal 2024.

• The company opened 30 new warehouses in fiscal year 2024, including its first-ever building in Maine and its 600th U.S. building in Eau Claire, Wisconsin.

• Comparable e-commerce sales increased 18.9%, with significant growth in sales of home appliances, furniture and large and bulky items.

• Revenue from membership fees increased by 7.4% year-on-year, excluding the impact of the extra week last year and currency effects.

• Costco Wholesale Corp (NASDAQ:COST) reported a 6.4% increase in global traffic or purchase frequency, indicating strong customer engagement.

Negative points

• The average transaction or ticket was negative globally at 0.9%, reflecting the adverse effects of gas and currency deflation.

• Higher wages in the U.S. and Canada were a drag on the SG&A rate this quarter.

• Interest income for the quarter was $138 million, up from $201 million last year, primarily due to a special dividend paid in January 2024.

• Foreign exchange differences and other factors resulted in a loss of $18 million this year, compared with a profit of $37 million last year.

• Renewal rates in the U.S. and Canada decreased slightly to 92.9%, impacted by lower renewal rates in the digital promotions cohort.

The most important questions and answers

Costco Wholesale Corp (NASDAQ:COST) Q4 2024 Call Results Highlights

Q: During the previous earnings announcement, there was discussion about the possibility of increasing SG&A leverage in the future. How should we reconcile this potential posture of increasing financial leverage, but also taking the same previous approach of restoring wage growth? AND: Gary Millerchip, CFO: We are focused on achieving balance across the company. We continue to invest in members, lower prices and invest in our employees. We believe this is critical to driving sales growth. Despite wage increases, we offset these costs by increasing productivity and sales leverage. Our goal is to sustainably increase revenues and profitability.

Q: Can you talk about the impact of card readers in the various stores you have implemented so far? In addition to MFI growth from fee increases, should we model potential membership growth or growth? AND: Roland Vachris, CEO: Card readers capture real-time traffic, improve front-end productivity and help manage membership verification. This has led to improved productivity and member experience, with some increase in member registrations and renewals.

Q: Can you talk about the port strike risks that come up here? What percentage of product passes through these affected ports? AND: Roland Vachris, CEO: We mainly import non-food items, which is approximately 25% of our total business. We have taken preventive measures, such as before shipping holiday goods, and are considering alternative mitigation plans. The situation is being closely monitored.

Q: Can you talk a little bit about the next developments in your second business line in terms of margin building, especially in terms of margins in e-commerce and gas? AND: Gary Millerchip, CFO: E-commerce and gas are the two biggest drivers of margin improvement. E-commerce showed strong sales growth and improved order fulfillment efficiency. Gas margins benefited from moderate tailwinds and a weaker quarter last year.

Q: Can you share something about why the US would abandon the 24 levels of new store development? Should we think of international as a more important growth industry for you? AND: Roland Vachris, CEO: The timing of opening new facilities depends on various factors such as infrastructure and utilities. We see sustainable growth opportunities both at home and abroad. We have several new markets lined up for expansion.

Q: What was the customer reaction to the MFI increase? Do you expect customer churn to increase? AND: Gary Millerchip, CFO: We have not seen significant member response. Membership renewal rates remain stable. Our efforts to stem inflation and provide value to members have been recognized, and we continue to invest in the member experience.

Q: What do you think about your consumer’s health? Any changes in consumer behavior worth noting during the quarter? AND: Gary Millerchip, CFO: Quality and value are more important than ever. As inflation fades, we’ve seen members spend more on non-food items. There is a shift from eating out to eating at home, with strong growth in the fresh and ethnic food categories.

Q: Can you give us details on e-commerce penetration, profitability and its impact on margins? AND: Gary Millerchip, CFO: E-commerce penetration is in the high single digit range. Including digitally started sales like Instacart, it would be double digits. E-commerce is less profitable than traditional shopping, but is improving due to sales growth and order fulfillment efficiency.

Q: Can you talk about competitive prices, especially in grocery stores? What are the price differences? AND: Gary Millerchip, CFO: We are focused on being the first to lower prices and the last to raise prices. The promotional environment has increased, especially in the field of home appliances and consumer electronics. We feel good about our position and continue to actively provide the best value to our members.

Q: Given recent wage increases, what are your average earnings today in the U.S. and globally? AND: Roland Vachris, CEO: In the US and Canada, the average wage is just north of $30 an hour.

For a complete transcript of the earnings call, please see Full Earnings Call Transcript.

This article first appeared on GuruFocus.