Inflation, Supply Chain Pressures Can't Stop Costco

Costco Wholesale had a blockbuster fourth quarter even as the company faces the same negative supply chain and inflationary pressures affecting all food retailers.

For the period ended Aug. 29, net income at Costco came in at $1.67 billion or $3.76 per share. Last year's fourth-quarter net income was $1.389 billion or $3.13 per diluted share. Net income for the fiscal year was $5.01 billion, or $11.27 per diluted share, compared to $4 billion, or $9.02 per diluted share in the prior year.

U.S. same-store sales for the fourth quarter excluding gas inflation and currency effects increased 10.3%. 

Net sales for the quarter increased 17.5% to $61.44 billion from $52.28 billion last year. Net sales for the fiscal year increased 17.7% to $192.05 billion from $163.22 billion last year.

Traffic or shopping frequency increased 8.8% in the U.S. Costco's average transaction or basket was up 5.6% in the United States. And e-commerce increased 8.9%.

Membership fee income for the fourth quarter came in at $1.234 billion, a 9.7% increase. The United States and Canada renewal rate was 91.3%, up 0.3 percentage point. 

Despite all of this good news, the retailer said it is putting limits "on key items like bath tissues, roll towels, Kirkland Signature water, [and] high-demand cleaning-related SKUs related to the uptick in Delta-related demand,” said Richard Galanti, CFO of Costco, during an earnings call.

“[W]e’re ordering as much as we can and getting it in earlier, and I think, as evidenced by the most recent sales results, we’re doing okay with this,” Galanti said.

Costco said it is experiencing port delays, higher labor and freight costs, and shortages on everything from shipping containers, trucks, and drivers to various components, raw materials, and ingredients, causing most of its general items to sell out within two weeks.  

Galanti also said fresh food inflation "is up in the mid to high single digits, with meat leading the way, up high single to low double digits due to feed, labor and transportation costs."

"It's a lot of fun right now," Galanti joked. 

In terms of the core margin on Costco's sales, in the fourth quarter, the core-on-core margins were lower by 40 basis points with nonfood slightly up, food and sundries slightly lower year over year, the company said. Fresh foods was down and was the fundamental driver of the core, and core being lower in the quarter.

Looking ahead to the holidays, the retailer said it plans to expand the assortment as a way to counter supply chain effects.

"For Christmas, it used to be just tree and trim, home and electronics," Galanti said. "Today, it's all those things, plus things for the house from barbecue grills, even summer items, but anything you can get your hands on. And again, I think we've done a very good job of adding suppliers where we can and also making sure we're coming up with new items and being creative and innovative on — even on the food and sundry side. So I think from that standpoint, despite sometimes looking at each other, the merchants and the traffic people, everybody is saying, boy, this — when is this going to end? The fact is I think we're doing a very good job with that."

Issaquah, Wash.-based Costco operates 809 warehouses worldwide. The company, which is No. 4 on Progressive Grocer’s 2021 PG 100 list of the top food and consumables retailers in North America, also has e-commerce sites in the United States, Canada, the United Kingdom, Mexico, Korea and Taiwan.