Story Stocks®
Updated: 13-Dec-24 11:16 ET
Costco's steady results continue in 1Q25, setting company up for successful holiday season (COST)
In a business climate in which value and quality are more important to the customer than in any other time in recent history, according to Costco (COST) CFO Gary Millerchip, the membership warehouse retailer delivered solid 1Q25 results. While an unfavorable calendar shift due to the later Thanksgiving holiday and lower gas prices weighed on sales a bit, which fell just short of expectations, adjusted EPS still grew by nearly 10% yr/yr to $3.82, edging past analysts' estimates. However, with shares hovering around all-time highs and with shares trading at a hefty 54x FY25 earnings, the company faced a high bar to hurdle, explaining the muted reaction the stock today.
- After stripping out the impact from changes in gas prices and FX, comparable sales increased by a healthy 7.1%, representing a slight uptick from Q4's growth of 6.9%. Similar to last quarter, the comp growth was mostly driven by traffic as shopping frequency increased by 5.1% worldwide. Unsurprisingly, the food and sundries category was solid, up mid-single-digits, illustrating that emphasis on value that Mr. Millerchip spoke of.
- Despite contending with a much choosier customer and the unfavorable calendar shift, COST still saw healthy demand in non-food categories such as jewelry, home furnishings, sporting goods, gift cards, and gold bars. All told, non-food was up high-single digits, helping to push e-Commerce comps higher by 13.2%. A key initiative for COST has been to improve its digital capabilities and those efforts are paying off, as reflected in yr/yr increases in e-Commerce traffic, conversion rates, and average order value.
- If there is one blemish, it's that COST's worldwide membership renewal rate slipped to 90.4% from 92.8% in the year-earlier period. The decrease is likely partly attributable to the membership fee increase that was announced on September 1, but a mix shift towards more new members renewing through the digital channel is also having an effect. While underlying renewal rates remain strong, this shift is expected to have an impact on COST's renewal rate for the remainder of FY25.
The main takeaway is that COST's solid Q1 results reinforced the bullish narrative that has propelled the stock higher by more than 50% on a year-to-date basis. Once again, the company is poised to emerge as a holiday season winner in the retail space as consumers seek out value by purchasing items in bulk while also shopping for gifts.