costco wholesale (Fee -1.13%) is unique among major national retailers in publishing monthly sales updates in between comprehensive quarterly announcements. The report tells investors nothing about how well the company did in generating profits. It also doesn't include data on customer traffic trends or key engagement metrics like membership renewals.
However, this report is still noteworthy for its timely understanding of sales trends. Investors can sometimes spot early signs of changes in demand long before Costco releases its full quarterly updates.
With that big picture in mind, let's take a look at the chain's January sales report, released on February 7th. This update included good news on growth and encouraging signs that cash flow is increasing.
Sales trends
Costco said same-store sales rose 3% overall and 2% in its core U.S. market, after adjusting for exchange rate fluctuations and gas price fluctuations. At first glance, this extensive update may seem like a disappointment considering his comps were up 8% last month.
But there's something odd about this year's calendar, with the big shopping day moving from January to December. Zooming out helped to adjust for that change, with sales up about 3% in December, but down by the same amount in January. Even accounting for this change, his comp trend remains stable at an impressive 5% rate. In other words, Costco's strong 2023 momentum will extend into the new fiscal year.
e-commerce segment
There is one segment of Costco's business that is definitely booming right now. It's electronic commerce. The sector grew 21% in January compared to a 17% increase in the previous month.
This is good news for shareholders for several reasons. After all, Costco's e-commerce division leans heavily toward discretionary purchases such as furniture, gold bars, jewelry, and consumer electronics. Shoppers refrained from buying these unnecessary items for much of 2023 due to rising inflation. But consumers appear ready to splurge again.
That means Costco could see an increase in customer numbers in 2024, and perhaps a faster pace of growth in average spending. Both factors are likely to keep the warehouse giant at the top of its industry while boosting shareholder returns.
We cannot expect a jump in profits.
Investors shouldn't expect Costco's growth in consumer discretionary sales to boost its profit margins. the goal. Target blamed weak demand in these niche markets for its operating profit collapse through much of last year. However, Costco did not report a similar decline in profitability in 2023, and likely will not see any increase in profitability this year.
That's because management is choosing to channel essentially all of its excess profits into expanding Costco's price leadership. It also explains why the chain's operating profit has remained stable at about 3% of sales over the past five years, despite some wild swings in consumer demand. By contrast, Target's profitability rose from 6% to nearly 10% over the same period, before falling to 3%.
That doesn't mean e-commerce sales aren't important. The extra cash from these sales will help the chain lower prices on consumer staples, giving shoppers more incentive to frequent its stores. As a result, Costco is expected to see improvements in renewal rates, sales growth, and customer numbers through early 2024.
