Costco profit beats estimates amid moderating inflation

Costco Wholesale Corp. posted higher-than-expected profit as moderating prices fueled consumer spending and store traffic climbed.

The big-box retailer reported earnings of $5.29 per share during the quarter ended Sept. 1, surpassing the average estimate of Wall Street analysts.

As inflation cools, shoppers are purchasing more non-foods items, Chief Financial Officer Gary Millerchip said Thursday on a call. Home furnishings and tires sold particularly well, while some products, such as consumer electronics and appliances, are getting cheaper.

“The value the company is able to provide on its discretionary offerings continue to resonate with consumers who have become increasingly selective in their spending,” Truist Securities analyst Scot Ciccarelli wrote in a research note.

Costco has historically been insulated from macroeconomic challenges given that its shoppers pay membership fees and tend to be more affluent. US comparable sales rose 5.3% for the period. By that same measure, e-commerce surged nearly 19%.

Sales of fresh food also rose during the quarter, and executives said the company is cutting prices of some Kirkland-branded products such as boneless chicken tenderloins and Spanish olive oil. Manufacturers and retailers are also offering more discounts to sell products.

Shopper traffic increased in the US during the quarter from a year earlier, although visitors spent slightly less per trip. Costco said it gained more paid members, and roughly 90% renewed their membership during the quarter.

Costco raised its membership fees in the US and Canada this month. It will likely take months to see how the change will affect renewal rates or sign-ups.

Ciccarelli noted that Costco has started to implement some changes that customers may find frustrating, including scanning membership cards at the entrance and packaging its popular rotisserie chickens in bags instead of sturdy containers. “These are not game changers, but could start to add some friction to sales, while the stock’s valuation leaves very little room for error,” he wrote.

The shares slipped 1.75% in trading Friday. The stock has risen 37% year-to-date .

Selective shoppers

U.S. retailers have posted a quarter of mixed results, showing consumers are being selective and making trade-offs ahead of the holiday season. Early projections on holiday spending point to a slight increase in store sales and a bigger jump in online spending.

Walmart Inc. and Target Corp. said shoppers are focusing on buying essentials, but noted there haven’t been any new signs of pullback. Home Depot Inc., however, said consumers are deferring large purchases due to economic uncertainty, while dollar stores have said lower-income shoppers are under pressure.

Ahead of the holidays, Costco Chief Executive Officer Ron Vachris said the company has been preparing for a potential port strike along the U.S. East and Gulf coasts. Costco, which primarily imports non-food items that make up about 25% of its total business, is getting some holiday goods earlier. It has also come up with contingency plans, such as shipping products to different ports.