Costco: How was the excellent performance achieved?

Below is the transcript of the $Costco Wholesale(COST.US) Q1 FY2025 earnings call. For earnings analysis, please refer to《Costco: The True 'Retail King' That Defies Cycles

1. Key Earnings Highlights:

2. Detailed Earnings Call Content

2.1. Key Management Discussion:

Business Growth Highlights

- Opened 7 new warehouses in Q1 FY2025, including 1 relocation, net increase of 6, with 4 outside the U.S.

- Opened the 897th warehouse in California the day before Thanksgiving, achieving a record $2.9M in opening-day sales.

- Plans to open 29 warehouses in FY2025, including 3 relocations, net increase of 26, with 10 outside the U.S.

Core Merchandise Sales

- Fresh Foods: Mid-single-digit comp sales growth in Q1, leading core merchandise.

- Meat Department: Double-digit growth, with demand for both premium and value cuts.

- Non-Food: High-single-digit growth despite calendar shifts. Categories like gold jewelry, gift cards, home goods, and sporting goods saw double-digit growth. Added premium brands like Peloton and Wrangler.

- Grocery & Sundries: Mid-single-digit comp growth, led by refrigerated/frozen foods. Strong momentum for international items like pork dumplings and hotpot beef. Kirkland Signature grew faster than overall sales, with price cuts on items like peanut butter.

Ancillary Businesses

- Pharmacy: Strongest sales growth, leveraging tech like new Rx inventory software and Instacart delivery.

- Food Court & Optical: Performed well this quarter.

- Gasoline: Low-double-digit sales decline due to lower prices.

- Costco Travel: Unique member value, with users spending ~2x more. Shared fun stats (e.g., rentals could fill U.S. parking lots 8.5x).

Digital & E-Commerce

- Tech roadmap progress, e.g., warehouse inventory checks via app. U.S. app downloaded 2.9M times in Q1 (~42M total).

- E-commerce traffic, conversion, and AOV rose YoY, driving comp sales. Hardware, sporting goods, and home goods saw double-digit online growth.

- Costco Logistics excelled; Costco Next set records during Thanksgiving week.

Retail Media

- Completed first targeted media campaign with a major CPG partner, achieving 2-3x ROAS. Working with 25+ vendors on next wave.

Net Income

- Q1 FY2025: $1.798B ($4.04 diluted EPS) vs. $1.589B ($3.58) YoY.

- Includes $100M tax benefit ($0.22 EPS) from stock comp vs. $44M ($0.10) YoY.

- Excluding discrete taxes, net income and EPS grew 9.9% and 9.8%, respectively.

2.2. Q&A Highlights

Q: Consumer health & seasonal inventory (e.g., apparel)? Non-essential category share?
A: Consumers prioritize novelty, quality, and value. Non-food categories like jewelry and gift cards grew double-digits. Meat/produce sales strong, with share gains in most categories.

Q: Traffic/basket drivers? Retail media upside?
A: Traffic/frequency solid; U.S. basket size +~2% ex-fuel. Retail media is incremental, with agency interest.

Q: Core margin drivers? Price reinvestment vs. other investments?
A: Food flat, non-food down slightly, fresh up—net +3bps. Hardware includes storage, tools, etc. Will balance price investments.

Q: Online vs. offline member renewal? Costco Next impact?
A: Digital recruits renew slightly below historical rates. Renewal data lags 18 months. Next enhances member relationships.

Q: Stock split? Tariff views?
A: No split planned but evaluating. Tariff timing/scope uncertain; past mitigation includes sourcing shifts.

Q: CapEx outlook?
A: Gradual increases reflect growth (new warehouses, tech). Prioritize warehouse quality.

Q: Int'l pipeline? Price vs. other investments?
A: ~30 warehouses/year, mostly ex-U.S. Fee reinvestment balances price cuts, wages, Kirkland innovation.

Q: Core margin +17bps ex-gas drivers?
A: Gas hurt by Mideast; e-com/credit card benefits offset.

Q: U.S. growth runway amid competition?
A: New warehouses (e.g., Pleasanton) drive incremental visits. Focus on member experience.

Q: E-com penetration (with Instacart/Uber)? Kirkland share?
A: E-com ~7-8% of sales; >10% with others ex-gas. U.S. Kirkland ~33%, growing faster.

Q: Traffic drivers?
A: Cross-functional: buying, ops, pharmacy/food court traction.

Q: Competitive response to fee hikes/Scan & Go?
A: Biggest competitor is ourselves. Scan & Go not a focus now.

Q: Category expansion/low-margin items?
A: Always exploring (e.g., caskets, gas). Benefits include traffic/cross-sell.

Q: High-income wallet share? 2% rebate +5bps?
A: Opportunity via brands like Kirkland. Rebate growth offsets quarterly.

Q: Instacart/Uber learnings?
A: Changed habits; growth at/above digital pace.

Q: Teamsters negotiations?
A: 40-year fair-dealing record; aim for timely agreement.

Q: Int'l trends?
A: Momentum solid; share gains continue.

Q: E-com UX vs. peers? Digital member growth?
A: Outpaced U.S. e-com growth. Improving search/app inventory. Digital recruits less aware of executive benefits.

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