Dive Brief:
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Costco Wholesale on Thursday beat back challenges like falling food and fuel prices to surprise analysts with an upbeat fiscal fourth quarter earnings report, posting profits of $779 million, or $1.77 per share, up from $767 million, or $1.73 per share, in the year-ago period.
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Costco's Q4 net sales rose 2.2% to $36.56 billion from $34.99 billion last year, beating expectations from analysts for earnings of $1.73 per share on $36.81 billion in revenue. Net sales for the fiscal year were $116.07 billion, an increase of 2% from $113.67 billion last year. U.S. same-store sales fell 1% and U.S. full fiscal year sales rose 1%; excluding fuel price deflation and currency fluctuations, Q4 U.S. same-store sales rose 2% and full year sales rose 3%, the warehouse retailer said.
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In part due to a rise in employee wages and currency headwinds, Costco's Q4 selling, general and administrative costs increased 5.6% from last year earlier to $3.7 billion, and merchandise costs rose 1.8% to $31.65 billion. But a 6% membership fee increase and savings coming from its credit card switch from American Express to Citi Visa helped mitigate that.
Dive Insight:
Costco created some unwelcome buzz of late as it fumbled its credit card switch from American Express to Citi Visa, with longtime customers failing to get their cards, somehow suffering account cancelations and finding little recourse from customer service, normally a Costco strong suit.
Yet the membership-based warehouse retailer is emerging from that mess with fourth quarter results that show once again that its approach of keeping things simple, with a basic (if carefully chosen) merchandise assortment, low prices and stellar customer relations, continues to pay off. Even the credit card migration appears to be working out after all, Costco CFO Richard Galanti told analysts Thursday, stating the switch exceeded expectations “in terms of conversion, usage and new sign-ups.”
Galanti said that the vast bulk of the windfall of savings generated by the new card will be felt by customers in the form of lower prices. While Costco may consider using some of the savings to invest in product development or other areas, keeping those prices low is a focus, he said, noting "That’s what drives us and drives our business."
Galanti also said that food prices are expected to continue to be deflated for the next five or six months, but asked by analysts what to expect on gas prices, Galanti responded “Who the heck knows.”
Costco has been faithful to its brick-and-mortar model, and Galanti said Thursday that while the retailer is improving its online search and purchase capabilities, its emphasis on price and value will preclude major omnichannel pushes like two-hour delivery. While part of “value” includes convenience, he said, Costco remains essentially a brick-and-mortar enterprise: That could be because the low margins of e-commerce, especially when same-day delivery is added, could interfere with Costco’s ability to bring its members low prices.
“Getting you in the store still is paramount to what we want to do,” Galanti said.