Costco: This is what it means to be a "retail giant" that transcends cycles!

On December 12th, after the US stock market closed, $Costco Wholesale(COST.US) released its Q1 financial report for the fiscal year 2025. As a mature leader in a traditional industry, Costco's performance generally does not experience significant fluctuations, and this quarter was no exception. Key indicators on the revenue side largely met expectations, while profits benefited from favorable tax conditions, with small supermarkets having optimistic expectations. Specifically:

In terms of core operating indicators, Costco's overall same-store sales growth this quarter was 5.2%, slightly down from 5.4% in the previous quarter, but within market expectations. Excluding the impact of oil price fluctuations and exchange rates, the overall same-store comparable growth rate was 7.1%, which actually showed a slight acceleration compared to the previous season's 6.9%.

The aforementioned 5.2% same-store sales growth can be broken down into a 5.1% increase in same-store customer traffic and a 0.1% increase in same-store per capita spending. The trend shows that same-store customer traffic growth has generally maintained steady growth (around 5% to 10%) over the past three years, while per capita spending has remained largely flat since entering fiscal year 2024 after a brief negative growth in the second half of fiscal year 2023.

By region, same-store sales in the US/Canada/other international regions grew by 5.2%/5.8%/4.7%, with the growth in the two North American countries being basically in line with expectations. However, other international regions seem to have experienced a significant slowdown in growth and underperformed market expectations. This was mainly due to the impact of exchange rate fluctuations and oil prices; excluding these factors, the same-store comparable growth in international regions was 7.1%. Although the growth rate has slowed by about 2 percentage points compared to the previous quarter, it is consistent with expectations. From a trend perspective, the same-store sales growth in the US has shown signs of continuous recovery since experiencing negative growth in the second half of fiscal year 2023.
As one of the new growth drivers, Costco's e-commerce sales grew by 13% year-on-year this quarter, showing a noticeable slowdown compared to the previous quarter's 19% growth and falling short of the market expectation of 14.1%. However, compared to the group's overall same-store growth rate of 5% to 6%, the e-commerce growth rate still reached 2x, which somewhat contributed to overall growth. According to the company, the sales of gold and jewelry in the online retail categories were the strongest, achieving double-digit growth.
The membership fee revenue, which is small in volume but high in profit, was $1.16 billion this quarter, a year-on-year increase of 7.8%, which was largely in line with market expectations. Driven by price and volume, this quarter the number of paying members increased by 1.2 million to 77.4 million, a year-on-year growth of 7.5%. The average annual membership fee was $60, which remained roughly flat year-on-year The price adjustment benefits starting from September 1 this year (average increase of $5 to $10) have not yet been reflected in financial revenue. However, possibly due to the price increase and Costco's recent crackdown on account sharing, as well as strengthened verification of membership status, this quarter the membership renewal rates in both global and North America slightly decreased by 0.1 percentage points compared to the previous quarter. Nevertheless, from a longer perspective, the current renewal rate remains at a high level compared to recent years.

5. After reviewing the operational indicators, in terms of financial performance, Costco achieved total revenue of $62.2 billion this quarter, a year-on-year increase of 7.5%, which is basically in line with market expectations.

The unexpected increase in gross margin is a highlight. This quarter's gross margin was 11.3%, up 0.3 percentage points both year-on-year and quarter-on-quarter, and also higher than the market expectation of 11.1%. According to the company's explanation, excluding the impact of oil and gas prices, the core gross margin increased by 17 basis points year-on-year, mainly due to the optimization of the product structure in core merchandise retail and the relatively reduced cost of 2% cashback for premium members. Similarly, due to the rise in oil and gas prices, the total sales and management expenses were $5.85 billion, a year-on-year increase of 9.1%, with the growth rate exceeding that of revenue, and the expense ratio expanded by about 14 basis points compared to last year. However, according to the company's explanation, after excluding the impact of oil and gas, the expense ratio remained basically flat compared to the previous quarter.

Due to the improvement in gross margin being largely offset by the expense expansion caused by rising oil and gas prices, Costco's operating profit margin for this quarter was 3.5%, slightly up by 0.1 percentage points year-on-year, with an actual operating profit of $2.2 billion nearly in line with market expectations.

However, on the net profit level, due to the tax expenses recognized this quarter being $510 million, significantly lower than the market expectation of $570 million, and also a decrease of about $9 million compared to last year. Therefore, this quarter's actual net profit exceeded the consensus expectation by about 6%, reaching $1.8 billion, a year-on-year increase of 13.2%.

Dolphin Investment Research Perspective:

As mentioned earlier, Costco, as a mature company in a traditional industry, generally has limited performance fluctuations, making it difficult to experience major shocks or significant surprises; it still excels in "stability" and "certainty." Excluding the unstable benefit of tax revenue, the only real highlight of Costco's performance this quarter that exceeded expectations may be the unexpected improvement in gross margin.

However, if one does not pursue surprises and focuses more on "stable happiness," Costco's operational indicators show steady mid-to-high single-digit same-store sales growth, a stable addition of millions of paid members each quarter, and a renewal rate of over 90%; in terms of financial indicators, this quarter still shows high single-digit revenue growth and double-digit profit growth, which undoubtedly can be considered good.

Although this may not attract investors seeking "growth." However, from a broader perspective, being able to consistently achieve "high single-digit revenue growth and double-digit profit growth" is undoubtedly a rare asset. (As a side note, currently among all leading Chinese concept assets, those that can achieve this are indeed few and far between) Of course, the current valuation of over 50x PE has indeed deviated from the pricing center of general assets. Discussing whether Costco's valuation is cost-effective is not particularly meaningful. It may be more about the choice made under conditions of ample funds and high optimism, where capital seeks certainty, seeks to band together, and seeks consistency. This may be somewhat similar to the situations with gold, Bitcoin, and even Tesla.

The following is a detailed commentary:

Core retail excels in stability

1. Steady growth in customer traffic, stable prices

Starting from the most important core operating indicators, this quarter, Costco's overall same-store sales growth rate was 5.2%, slightly down from 5.4% in the previous quarter, but within market expectations. Moreover, after excluding the impact of oil price fluctuations and exchange rates, Costco's overall same-store comparable growth rate was 7.1%, which is slightly faster than the 6.9% in the previous quarter.

In terms of price and volume driving factors, the 5.2% sales growth in same stores can be broken down into a 5.1% increase in same-store customer traffic and a 0.1% increase in same-store per capita consumption. From the trend, it can be seen that the growth in same-store customer traffic has generally remained stable over the past three years, with fluctuations mainly stemming from the increase in per capita consumption. It can be observed that after experiencing the "inflation period" from 2021 to the first half of 2023 (where per capita consumption increased significantly) and the "deflation period" in the second half of 2023 (where per capita consumption declined), per capita consumption has remained flat year-on-year for nearly five consecutive quarters in the 2024 fiscal year.

Overall, Costco continues to maintain stable and relatively strong growth (compared to the industry and peers).

2. U.S. consumption is stable and improving, while international shows some decline

By region, same-store sales in the U.S./Canada/other international regions grew by 5.2%/5.8%/4.7%, with the growth in the two North American countries being basically in line with expectations, while other international regions seem to show a significant slowdown and underperform the market expectation of 7.1% growth. However, this is mainly due to the impact of exchange rate fluctuations and oil prices; after excluding these factors, the same-store comparable growth in international regions was 7.1%, which is also generally in line with expectations.

From a trend perspective, there has indeed been a slowdown in growth in international regions and Canada since the 2024 fiscal year. Conversely, the U.S. market shows signs of continuous recovery from negative growth in the second half of 2023. From Costco's perspective, U.S. (middle-class) consumption has indeed been gradually improving since the beginning of 2024.

3. E-commerce growth still leads, but there is a noticeable slowdown

As a new growth driver in the post-pandemic era, Costco's e-commerce sales this season increased by 13% year-on-year, a significant slowdown compared to last season's 19% growth rate, and also noticeably lower than the market expectation of 14.1%. Excluding the impact of exchange rates did not show a significant change. Compared to the group's overall same-store growth rate of 5% to 6%, the e-commerce growth rate still reached 2x. According to the company, sales of gold and jewelry in online retail were the strongest, with double-digit growth.

Due to the stable performance of the above core operating indicators, which generally met expectations, Costco confirmed sales revenue of approximately $60.9 billion this quarter, a year-on-year increase of 7.5%, which is basically in line with market expectations.

2. Price increase benefits have yet to materialize, renewal rate slightly declines?

The relatively small but highly profitable membership fee revenue this season was $1.16 billion, a year-on-year increase of 7.8%, which is generally in line with market expectations. Driven by price and volume, this quarter the number of paid members increased by 1.2 million to 77.4 million, a year-on-year increase of 7.5%. The average payment price per member is $60 (annualized), which is nearly flat year-on-year. The benefits of the price adjustment that took effect on September 1 this year (an average increase of $5 to $10) have not yet reflected in financial revenue.

However, it seems that due to the price increase and Costco's recent crackdown on account sharing, as well as strengthened verification of membership status, this quarter the renewal rates for members globally and in North America both slightly declined by 0.1 percentage points. However, from a longer perspective, the current renewal rate remains at a high level compared to recent years.

3. Taxes are the main source of profits exceeding expectations

After analyzing the core operating indicators, in terms of financial indicators, Costco achieved total revenue of $62.2 billion this season, a year-on-year increase of 7.5%, which is basically in line with market expectations.

From the perspective of gross profit, thanks to the better-than-expected improvement in gross margin, this quarter's gross margin is 11.3%, an increase of 0.3 percentage points both year-on-year and month-on-month, and also higher than the market expectation of 11.1%. According to the company's explanation, excluding the impact of oil and gas prices, the core gross margin increased by 17 basis points year-on-year, mainly due to the optimization of the product structure in core commodity retail and the relatively reduced cost of the 2% cashback for premium members.

In terms of expenses, Costco's total sales and management expenses this quarter amounted to $5.845 billion, a year-on-year increase of 9.1%, with a growth rate slightly higher than revenue. The expense ratio expanded by about 14 basis points compared to last year, with actual expenses slightly exceeding expectations by 2%. However, according to the company, the expansion of the expense ratio is mainly due to the rise in oil and gas prices; after excluding the impact of oil and gas, the expense ratio remained basically flat month-on-month.

Due to the benefits of the improved gross margin, most of which were offset by the expansion of operating expenses caused by rising oil and gas prices, Costco's operating profit margin for this quarter was 3.5%, a slight increase of 0.1 percentage points year-on-year, which is very small. Therefore, the actual operating profit of $2.2 billion is nearly in line with market expectations.

However, in terms of net profit, the tax expenses recognized this quarter were $510 million, significantly lower than the market expectation of $570 million, and decreased by about $9 million compared to last year. Therefore, this quarter's actual net profit exceeded the consensus expectation by about 6%, reaching $1.8 billion, a year-on-year increase of 13.2%.

According to the company, the tax expenses were lower than expected mainly due to the favorable tax impact from changes in equity incentive expenses, benefiting about $100 million this quarter, compared to about $44 million in the same period last year.

After excluding the impact of this part of the tax expenses, the year-on-year growth of net profit is 9.9%.