Price Cuts, Freight Costs Pressure Costco's Margins, Shares Slip
Warehouse club operator Costco Wholesale Corp. reported third-quarter results that topped analysts' estimates, but price cuts and higher freight costs weighed on its gross margins, sending its shares lower in extended trading.
The retailer has aggressively cut prices in order to lure back customers to its wholesale supermarkets, following Amazon.com Inc's foray into brick-and-mortar retail with the acquisition of Whole Foods Market last year.
Customer Gains And Higher Wages
Gross margins slipped 46 basis points to 11.05% as the company also stepped up efforts to provide same-day and two-day delivery through delivery service provider Instacart and invested in packaging equipment.
Still, the company said an increase in membership fees implemented earlier this year and customer gains from the closure of more than 50 Walmart Inc.'s Sam's club stores could help offset pressure from rising freight and labor costs.
Costco also said effective 11 June, starting wages for its US employees will be raised by $1 to $14 and $14.50 an hour.
This is expected to result in higher pretax cost of $110 million to $120 million annually, with its fourth quarter taking a $25 million hit.
"The concern is probably around the gross margin and wage increases," Edward Jones analyst Brian Yarbrough said, pointing to the stock's 2% fall in extended trading.
However, Costco's moves to invest heavily in its online and delivery services helped drive a 14% growth in revenue from membership fees and a 35.5% rise in e-commerce sales in the third quarter.
Sales at established stores, excluding fluctuations in gas prices and currencies, rose 7% in the reported quarter, beating analysts' estimate of a 5.4% rise, according to Thomson Reuters I/B/E/S.
"Costco continues as the retail poster child for consistency, with virtually every metric reflecting strength," Moody's retail analyst Charlie O'Shea said.
Net income attributable to Costco rose to $750 million, or $1.70 per share, in the quarter ended 13 May from $700 million, or $1.59 per share, a year earlier.
Excluding items, the company earned $1.70 per share, a penny above the average analyst estimate. Total revenue rose 12.1% to $32.36 billion, also beating estimates.