3 Surprising Details From Costco's Earnings Release

Key Points

• Costco increased quarterly revenue while many other retailers' revenue declined.

• E-commerce is an increasingly important part of Costco's growth plan.

• The company has cut back on stocking holiday discretionary items this year.

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Bulk retailer Costco (NASDAQ: COST) released slightly better-than-expected quarterly earnings results on Thursday, but the market wasn't impressed, sending shares 2% lower during Friday's trading session.

That in itself was a bit of a surprise, and analysts were left searching for an explanation. But some of the bigger surprises in the report were found outside of the results themselves.

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Here are three of the most surprising details from the warehouse retailer's earnings report.

Image source: Getty Images.

1. Costco bucked the retail trend

Unlike many other general merchandise retailers, Costco saw increases in both revenue and net income during the quarter. That put it in stark contrast to much of the rest of the retail landscape, including Target and Macy's, both of which posted year-over-year declines in revenue and net income in their comparable quarters.

This is consistent with a pullback in consumer discretionary spending. Because Costco sells its products at very slim margins, making the bulk of its profits from membership fees, it's seen as an attractive option for bargain-conscious customers.

And the company's 8% sales increase to $86.2 billion bested the revenue increases of other discount retailers like Walmart and Dollar General, which both grew revenue by about 5% in their comparable quarters. Costco's gain represented a slight upside surprise to analysts, who were predicting $86 billion in sales for the quarter.

2. It's not all about the warehouses anymore

Costco is famous for its cavernous physical warehouses, but its better-than-expected sales were fueled by a 13.6% year-over-year rise in quarterly e-commerce revenue.

For its full fiscal year (ended on Aug. 31), e-commerce sales rose 15% to $19.6 billion, or 7% of net sales. Traffic to its e-commerce site was up 27%, indicating that the company's efforts to build out its digital infrastructure were bearing fruit. It now offers same-day delivery of many items via Instacart, Uber Eats, and DoorDash, as well as scheduled delivery of larger items by Costco Logistics, including free haul-away of old items like appliances or furniture.

Management credits these e-commerce investments for growth in younger members. According to chief financial officer Gary Millerchip on the earnings call, nearly half of new memberships are coming from people under the age of 40. Although that's "a net positive," according to Millerchip, it does have a notable drawback: Online members are slightly less likely to renew, so management is anticipating that small declines in its renewal rates will continue as online memberships grow.

3. A different holiday mix

At Costco, the holiday shopping season has essentially already begun: Christmas trees, decorations, and gift wrap have already shown up in warehouses and online. However, CEO Ron Vachris warned that the company's holiday offerings would look a bit different this year:

Our [product] buyers, when we were booking for this holiday season, really had to evaluate all the discretionary items, the toys and the trim and the decorations and those kind of things, and made decisions based on the necessities and what they felt needed to be in Christmas trees. We really thinned down that whole category, and we thinned down a lot of the additional seasonal areas as well. What that provided us was the opportunity to bring in ... high ticket goods that are very relevant to the time of year, but not reflective of the traditional Costco set. [For example,] we normally didn't do any furniture that time of year [due to space limitations], but it has great opportunities for top-line sales. I feel really good about the way the buyers have pivoted on the discretionary items.

This will certainly come as a surprise to shoppers, who are used to seeing multiple sizes and styles of Christmas trees, and plenty of other Christmas decorations and toys in their local Costco warehouse.

However, all of these are discretionary purchases. By signaling that it has already "thinned down" its stock of such items, replacing them with larger "high ticket goods," Costco is sending a clear signal that it doesn't expect broad discretionary spending to rebound this year.

All in all, its quarter was free from major surprises, and the company continues to outperform in every way except share price appreciation. Its stock is essentially flat for the year, lagging the S&P 500 by more than 13 percentage points:

However, if consumers do pull back further on discretionary spending, Costco is better positioned than most retailers to retain its value. It's definitely worth keeping on your radar screen.

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John Bromels has positions in Costco Wholesale and DoorDash. The Motley Fool has positions in and recommends Costco Wholesale, DoorDash, Target, Uber Technologies, and Walmart. The Motley Fool recommends Instacart. The Motley Fool has a disclosure policy.