Monthly Digest Call
We are hosting our monthly Digest call today at 10 AM ET.
For the webcast and slides CLICK HERE.
Refreshingly steady FQ3 (COST)
Costco reported FQ3 EPS of $3.43, above consensus expectations of $3.29. The adjusted results exclude a $.50 charge for the cancellation of container ship charters that locked the company at above market rates.
SSS increased 0.3%, but excluding Fx and gas increased 3.5% in FQ3, slowing sequentially from +6.8%. US adjusted SSS increased 1.8%, decelerating from 5.8% sequentially. Canada increased by 7.4%, and other international increased by 8.4%. Traffic increased by 4.8% worldwide and 3.5% in the U.S. The average ticket decreased by 4.2% worldwide and decreased by 3.5% in the U.S. due to weakness in big ticket non-food discretionary items. Gas deflation was a 1.7% headwind. E-commerce sales decreased by 9%, similar to the 8.7% decrease in FQ2. Big ticket departments including majors, home furnishings, small electrics, jewelry, and hardware comprise 55% of e-commerce sales and 8% of warehouse sales. Membership fee income growth of 6.1% with a renewal rate of 92.6% in the U.S. Inflation is also abating. Management estimated inflation to be +8% in Q4 and slowing to 3-4% in FQ3.
Gross margins expanded 13bps or 50bps ex. gas and the charge for the shipping charters. Core gross margins expanded 24bps ex. gas, improving from -26bps. There was no LIFO charge this year. Inventory levels were down 7% at the end of the quarter compared to -2% at the end of FQ2. SG&A deleveraged by 34bps ex. gas due to higher operational costs from slower sales growth and higher wages. Gasoline gallons sold were flat, the average price per gallon decreased by 11%, and it continues to be profitable. Private label mix increased by 120bps, accelerating from the pace of gains in recent years.
Management said they believe they have enough levers to drive the business without a membership fee increase now, but it will not be a long time before it is increased. Costco is on our long list as an outperformer in Quad 4. Despite a slowing top line due to weakness in big ticket items the food business continues to outperform. Margins have inflected and inventory levels are improving. Costco’s style factors are a match for outperformance and the visibility of sales and earnings in Quad 4 are accorded a premium multiple.
Low favorability (TAP, BUD)
In a Civic Science poll, 31% of adult respondents said they planned on celebrating Memorial Day with an alcoholic beverage. The percentage was only down 1% from last year. Heineken had the highest brand favorability among expected drinkers at 40%, closely followed by TAP’s Coors Light and Miller Lite. Bud Light, despite being the #1 beer brand had a favorability score of 27%, the only brand below 30%. In some social circles, it is no longer acceptable to be drinking Bud Light. We are hosting a Molson Coors Black Book on Tuesday at 2 PM ET and will delve into the market share opportunity Bud Light’s challenges represent. To add the event to your calendar CLICK HERE.
A new reason to stay home (DASH, DEO)
According to DoorDash’s survey 1 in 10 consumers have ordered alcohol delivery in the past six months. Alcohol delivery and pickup orders on DoorDash grew 100% YOY.
- 60% of respondents report using on-demand alcohol delivery more than the prior year.
- 18% of respondents said they order alcohol delivery to save money (presumably compared to visiting on-premise).
- The top three reasons given to order alcohol online were indulging oneself, for a party, and to avoid leaving the house after already having drinks.
- The most popular alcoholic beverages among the respondents were: FMBs and hard cider, whisky, bourbon, scotch, RTD cocktails, vodka/tequila, and wine/champagne.
People had more at-home parties due to pandemic restrictions and now are staying home more often due to inflationary pressures.
