Most metrics outperform while sales slip
Costco’s Q2 is a story about executing long term investments in the face of short term fluctuations. By most metrics, Costco’s quarter was sound. Renewal rates jumped to new highs, margin strength in particular blew far past Wall Street expectations, and eCommerce continued to grow upwards of 20%. The only real area of dissent was some softness in February sales growth and comps which in turn dragged on the company’s quarterly performance. These results were a little lower than what might have been expected purely based off of some unfavorable Lunar New Year calendar shifts versus the prior year. It is far too soon to tell if these results are the beginning of a larger trend of comps deceleration or only a blip on the radar in Costco’s ongoing growth saga. The following months and next quarter’s results will be telling.
Investing in backend operations
On the backend, Costco is juggling a host of operational and eCommerce investments including opening more fulfilment centers, return centers, and vertically integrated food supply chain facilities across North America. These initiatives help Costco achieve its dual goals of lowering costs and gaining more control over the supply of its inventory. Globally, Costco is preparing for its first club in China as well as eCommerce site launches in Australia and Japan. Eventually, the retailer wants to have a transactional eCommerce platform in all of its markets.
Where does Costco stand?
Costco’s perennial strategy of focusing on volume over margin and long-term member loyalty over short-term gains remains as intact as ever. It is almost guaranteed that margins will be deliberately pressured down in the near future as Costco reinvests in price. CFO Richard Galanti effectively said as much during their quarterly earnings call. The larger question, however, is if Costco’s U.S. growth could taper off as it increasingly saturates the market in the coming years. So far, Costco itself has been pleasantly surprised by how little its newer clubs seem to cannibalize its longstanding buildings. However, it’s possible this state of affairs might not be the case several years from now. Eventually, expect international openings in Asia and continental Europe to carry a greater share of the retailer’s growth.
To learn even more about Costco, our annual Costco workshop is fast approaching on March 19, held in Seattle. If you’re interested, it’s not too late to register.