Costco Wholesale (COST) is on the Hedgeye Consumer Staples Best Ideas list as a LONG.
HEDGEYE OPINION
Last night COST reported December comp sales of +3% in the U.S., which were in line with consensus estimates. Management noted that they continue to see deflation in many areas of the business, specifically within food and sundry categories. Traffic for the total company was up just over 2% and up just over 3% in the U.S. specifically (In the U.S., front-end basket was slightly up in units, while the average value of the basket was down -2% in dollars). COST stated that the average transaction was up ~0.75% for the month of December, and this was negatively impacted by food and general merchandise deflation and a -50bps impact from foreign exchange. COST also noted that U.S. regions with the strongest results were the Midwest, Texas and Northern regions.
Food deflation continues to play a key role in the COST story, as it persists across multiple departments within food, meat and deli. Despite this, we continue to view COST as a strong business model in a highly competitive food retail landscape, and believe that a turn towards inflation will commence in the not too distant future.
NOTABLE COMMENTARY FROM THE CALL
“We continue to see deflation in many areas of the business, including multiple departments within food and sundries, such as cooler, frozen and sundries; consumer electronics and hardlines; and deli and meat within fresh foods.”
“Gasoline prices turned inflationary year-over-year in the month and contributed a slight positive impact on total reported comp sales this month.”
“In terms of regional and merchandising categories, in the U.S., regions with the strongest results were the Midwest, Texas and Northwest regions. Internationally, in local currencies, we saw the strongest results in the UK, Mexico, Korea and Spain.”
“The impact of cannibalization on total company sales in December was approximately minus 50 basis points, similar to what we’ve seen in recent months in fiscal quarters. Canada saw the impact of cannibalization climb to minus 200 basis points, as we recently opened three new buildings in existing markets.”
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
