Trade up Not Down (COST)
Costco reported adjusted FQ1 EPS of $3.10 vs. consensus of $3.12. Fx was a $.12 headwind in the quarter. Gross margins were 30bps lower than expectations while SG&A was 10bps lower than expectations.
Total SSS increased by 6.6% and ex. gas and Fx increased by 7.1%. U.S. SSS ex. gas and Fx increased 6.5% while Canada increased 8.3%, and Other International increased 9.1%. Traffic increased 3.9% worldwide and 2.2% in the U.S. while transaction size increased 2.6% worldwide and 6.9% in the U.S. Food inflation was estimated to be +6-7%. Membership fees grew 5.7% or 9% in constant currencies.
Gross margins contracted 45bps, ex. gasoline contracted 21bps, and ex. one-time adjustments contracted 3bps YOY. Inventory decelerated to SG&A improved by 35bps YOY and ex-gas improved by 13bps.
It is difficult to have a long career in consumer stocks if you count Costco out over periods of long duration. When expectations for Costco include slowing/disappointing SSS, margin headwinds, and do not include a membership fee increase the risk/reward is favorable. In addition, Costco has historically had strong absolute and relative performance in Quad 4.
On-premise wine sales (NAPA, VWE)
On-premise wine sales grew 22% to $14.8B in the year that ended October 8 according to CGA Strategy by NielsenIQ. Total domestic wine sales grew 20% to $9.2B. Wine sales lost 1.1% share to spirits and beer during the year. The number of fine dining outlets has decreased by 4.1% from the prior October. Surveys continue to show that half of the diners report drinking something different than they drink at home, emphasizing the potential impact of the lost venues. Over the past year, total spirits sales in the on and off-premise channel have grown more than 18% with the on-premise channel accounting for 71% of total sales value. As spirits have made more inroads with the younger generations demographics are against the wine industry.
Container rate relief (WMT)
Global container volumes have fallen 9.3% this year according to BIMCO, causing an overcapacity situation pressuring rates. In October, trade data shows that imports from Asia fell 11% YOY. During June ocean freight rates flipped from being higher YOY to being lower as seen in the chart below. Target and Walmart said they were canceling orders and clearing out inventory in early June. Walmart is the largest importer in the U.S.
According to Xeneta’s index, ocean freight rates fell 5.7% in November. It was the third consecutive month of declines and the largest month over month decline since the index began in 2019. According to Freightos prices for Asia to West Coast route fell 26% to $1,426 per FEU, 90% lower YOY. Prices for Asia to East Coast route fell 19% to $3,723, 78% lower YOY. Prices for the Asia to Northern Europe route fell 2% to $3,974, 73% lower YOY. Lower fuel prices have relieved some pressure on container rates. Compared to 2019 the Asia to West Coast rate is 5% lower while rates to the East Coast are 32% higher.
What went up has rapidly come down. Freight rates will be a margin tailwind in 2023 for Walmart and Costco.
