Seven things we learnt from Costco’s Q4 results

Date : 28 September 2022

Oliver Butterworth

Senior Analyst

Costco’s fourth quarter results revealed a strong finish to the year with total revenue exceeding $220 bn. We look at the factors underlying this performance and what to expect in the year ahead.

Fourth quarter and full year key numbers

  • Q4 total revenue up 15.2% to $70.8 bn, with full year revenue up 16% to $222.7 bn
  • Comparable sales for the quarter (ex-fuel and currency impacts) up 13.7%, including up 15.8% in the US, 13.4% in Canada and 2.9% in other international markets
  • Q4 ecommerce comp sales up 7.1%, up 10.1% for the full year
  • Traffic increased 7.2% globally and 5.2% in the US. Average transaction/ticket was up 6% globally and 10% in the US
  • Operating income for the quarter up 10%, and for the full year up 16.2% to $7.8 bn, representing 3.5% of revenue
  • Net income up 11.9% for the quarter and up 16.6% for the full year

1. Strong appeal in the Costco model as renewal rates hit new all-time high

The success and continued appeal of the Costco model is reflected in its membership renewal rates. For the US and Canada, Q4 renewal rates were 92.6% (0.3% higher versus Q3). Worldwide renewals for the quarter reached 90.4%, up 0.4% from Q3. Costco ended Q4 with 65.8m paid household members and 118.9m cardholders, both of which were up 6.5% year-on-year. These impressive renewal rates have been supported by the auto renewal feature offered to users of its Costco Citi Visa co-brand credit card, which is also offered to regular Visa card holders and through some Mastercards. In the US, the percentage of auto renewals was mid to high 50’s. 

2. No plans to increase fees at this stage

For fiscal ‘22, membership fee income reached $1.3 bn, an increase of $93m. While there has been speculation through 2022, the retailer has no plans to raise membership fees at this time, as it is pleased with its growth seen both in top line sales and membership households in recent quarters. In part, this also reflects the financial pressures many households are currently facing.

3. Bringing delivery in-house has enabled bulky items to be delivered three times quicker than three years ago

Costco acquired Innovel in 2020, becoming Costco Logistics. The move saw it add between 10 and 20m sq. ft of depot space. This has enabled it to switch between vendor drop ship, to shipping big and bulky items from its own inventory.

In fiscal 2022, it completed 4.3m big and bulky deliveries and installations - more than double the 2m it delivered pre-acquisition. Previously all of these 2m deliveries were fulfilled by third parties, whilst in 2022, 70% were managed in-house, rising to 81% in Q4. The estimated time for the delivery of bulky items has decreased from more than 15 days to less than five. This sets a platform for Costco to be a much bigger operator in this space, with scope to expand the range of products offered, including electricals and furniture.

4. ‘A little light at the end of the tunnel’

Referring to inflationary pressures, Costco is starting to see “a little light at the end of the tunnel.” It is starting to see the price of some commodities (e.g. gas, steel, beef) and raw materials decrease versus a year ago, and even some small cost changes in plastics. In terms of the supply chain, container rates have come down and container shortages have improved, as well as port delays.

5. Private label up to 28% of sales

Despite the inflationary environment, Costco said its customers are not trading down but are trading up or certainly trading the same as before. Sales for its Kirkland Signature private label maintain a steady growth, gaining 1% penetration year-on-year and now accounting for 28% of total sales. Not only is this a key part of the Costco value proposition, but an important differentiator and traffic driver.

6. Two new market entries planned for 2023

Costco opened 23 net new warehouses in fiscal ’22, in addition to three relocations. Nine of these opened in Q4, including five stores in the US, two in Canada and one each in Korea and Japan. In fiscal ‘23, it plans to open 29 new warehouses (including four relocations), with over half of these (15 stores) in the US. New openings will see it enter two new markets: New Zealand and Sweden. The launch in Sweden is expected in autumn.

Its CapEx for the year ahead is expected to be close to the $3.9 bn in fiscal ‘22.

7. Strengthening its positioning in Asia

Back in June, Costco acquired the 45% minority interest from its JV partner in Taiwan, giving it full ownership of Costco Taiwan. New openings in Korea and Japan, and the third and fourth stores it plans to open in China in fiscal 2023 will help it to build a deeper presence in Asia.

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