Costco Wholesale Corp reported a drop in gross margins on May 26, hit majorly by growing freight and labor costs throughout the United States. This scenario sent shares of the membership-only retailer down 2% and overshadowed an otherwise upbeat quarterly report.
American firms across the board have been struggling with higher costs as a result of supply chain disruptions, exacerbated by new COVID-19 lockdowns in China and the Russian-Ukraine war. Costco stated that it had decided to increase prices in certain areas of food to resolve inflation.
Retailers like Target Corp and Walmart Inc have also warned of decades-high inflation hitting their profits, with the customers refraining from purchasing non-essential and high-margin products.
But, Costco managed to post a quarterly profit and revenue that handily topped estimates as an average shopper at the warehouse club operator earns more than a normal Target and Walmart customer. The firm’s efforts to keep gas prices a few cents below the national average have also driven memberships and sales higher.
Contrary to Walmart, Costco stated that there has not been a lot of a trade down or trade out from branded products to its private label product, Kirkland Signature. The senior vice president of finance and investor relations, Robert Nelson, stated in a post-earnings call:
“We’re not seeing trade down really. We’re seeing a little bit of shift in where people are spending their money. This year, it’s more sales in tickets, restaurants, travel, tires and gas.”
In the third quarter, Costco’s gross margins dropped by 99 basis points. Costco’s cumulative revenue surged by 16% to $52.60 billion in the quarter ended May 8, when compared with estimates of $51.71 billion, based on the Refinitiv IBES data.
Excluding items, Costco earned $3.17 per share, exceeding estimates of $3.03.
