Costco Shows Good Performance Amid Investor Skepticism

11:26 10/10/2017

Shares of Costco Wholesale Corporation COST  closed down 5.97% last Friday in spite of what appeared to be better than expected quarterly statistics. In the fourth quarter ending September 3rd, 2017, Costco’s total revenue increased by 15.7% YOY to a little over $42B, owing over 5% as a result of foreign exchange and commodity price changes. The member fees were reported to be a 13% increase adding up to $943M. The overall report documented a net income of $919M, up from $779M. The difference comes out to $2.08 per share and $1.77 a share respectively. 

The fall may have left some investors scratching their heads but bearish signals could be a result of internal and external factors. Costco hiked membership fees that added an improving jolt to the books. Yet, the rise associated from the increase in fees have yet to be reported, with more of the subscriber count renewing at the higher rate starting the 2018 fiscal year for Costco. 

During Costco’s post-earning conference call that occurred on last Thursday, they commented that gross margins in the fourth quarter were lower YOY by 15 points. They owe this to increased spending in driving sales and member loyalty programs.

Additionally, the temporary boost from a higher subscription could be offset by a declining membership-renewal rate. However, Richard Galanti, their chief financial officer, suggested this may be a result of Costco not accepting American Express. What is more likely is that the increase in costs may have something to do with it. Other concerns that could have led to the fall could be a developing grocer price war. 

Costco’s business model mainly drives revenue from their membership club program. The products are priced at a near break-even which minimizes the exposure of losing profits as a result of pricing or price wars. However, one of the factors that could be Amazon’s AMZN  recent acquisition of Whole Foods WFM . This partnership makes high quality produce and food items more widely available at a lower cost, significantly increasing competition.

The shares of Costco actually began to dip in June as the Amazon and Whole Foods deal came to light. In an attempt that appears more reactionary than proactive, the company has covered two new delivery options on the company’s website. The two delivery options include a two-day delivery of nonperishable dry food items and a same-day delivery of both dry and fresh groceries through a partnership developed with Instacart.

The bearish trend on the company could appear to continue with investors’ apprehensiveness to Costco’s reactionary delivery options, a drop in renewal rates, and a spontaneous increase in membership prices. The real threat for next year’s returns could come at the cost of the competitive landscape mainly that of Amazon-Wholefoods though.

This article has been provided by a Chasing Markets contributor. All content submitted by this author represent their personal opinions, and should be considered as such for entertainment purpose only. All opinions expressed are those of the writer, and may not necessarily represent fact, opinions, or bias of Chasing Markets.
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