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E-commerce accounts for 4% of Costco's sales and is growing 12%

March 6, 2017 11:18 AM
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Costco Wholesale Corp. reported total revenue of $29.78 billion, which includes membership fees, in its fiscal second quarter ended Feb. 12, up 5.7% from $28.17 billion in the year-ago quarter. Analysts had predicted $29.9 billion.

Costco, No. 8 in the Internet Retailer 2016 Top 500 Guide, does not break out online sales, but chief financial officer Richard Galanti said last week during the earnings call with analysts that e-commerce represents about 4% of sales and is growing at a rate of 12%. Net sales were $29.13 billion in fiscal Q2, which means online sales were about $1.17 billion in the quarter.

Same-store sales, excluding gas and currency changes, rose 3%.

For the first six months of its fiscal 2017, Costco’s total revenue was $57.87 billion, up 4.5% from $55.39 billion. Net sales were $56.60 billion through the first six months of the fiscal year, which means online were about $2.26 billion in the period.

The company has been less aggressive in pushing into e-commerce than many rivals, but it’s working with Google Express delivery service on a program that would ship products in one to three days in the continental U.S. Costco also is testing other third-party shipping providers, such as Instacart, and expanding its online selection of apparel, appliances and other products.

When it comes to e-commerce, “we feel fine with where we are,” Galanti said on a conference call Thursday.

"In terms of improving experience and functionality of the site, we've improved search, we've shortened the checkout process, and we've improved our member's ability to track their orders, and we'll continue to do some more of that," Galanti said. "Just recently, we automated much of our [online] returns process, not only providing members a much better quality of service, but also reducing by more than 20%, in just the first couple of months, our call center volume related to returns."

Also, in the U.S. and Canada, Costco fulfills online orders from 11 distribution points, allowing for closer and fast delivery of online orders, Galanti said.

Costco also continues to expand its physical footprint. The company will net an additional 29 locations this year, and it’s opening its first stores in France and Iceland in May.

Shares slid Friday but had been riding high after January sales that beat analysts’ estimates by more than twofold. The second quarter results, coming from a company that’s widely seen as a retail bright spot, renew concerns about the industry. Best Buy Co. (No. 12 in the Top 500) and Target Corp. (No. 22) both gave pessimistic outlooks last week, dragging down shares of the big-box retailers.

Membership fee hike

A membership-fee increase announced Thursday also failed to placate investors. The company plans to boost its rates by $5 this year, a move that should help fuel sales and earnings.

As of June 1, its annual fees will climb to $60 for Goldstar and business members, Costco said. Its executive memberships will rise $10 to $120. The warehouse-club chain counts on the money for about 70% of operating income, and increases are closely watched by analysts and investors. The changes will affect about 35 million members.

Gas inflation was the biggest headwind to the retailer this quarter, negatively impacting profit by 6 cents per share. It’s somewhat counter-intuitive—while higher gas prices should boost sales, Costco’s commitment to keeping the prices down hurts margins.

“When they set a price at the beginning of the week and then have to buy more during that week, that works against them,” since Costco turns gas, and most products pretty quickly, said David Schick, lead retail analyst at Consumer Edge Research. “They have to buy at a higher price,” but keep the same low price that they had already set.

 

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