Costco: This is what we call a "retail leader" that transcends cycles!

On December 12, after the US stock market closed, Costco 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 and small supermarket expectations. Specifically:

1. 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. After excluding the impact of oil price fluctuations and exchange rates, the overall same-store comparable growth rate was 7.1%, which is actually a slight acceleration compared to last 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 average spending per customer. The trend shows that same-store customer traffic growth has generally maintained steady growth (around 5% to 10%) over the past three years, while average spending per customer has remained largely flat since entering fiscal year 2024 after a brief negative growth in the second half of fiscal year 2023.

1. 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; after excluding these factors, the same-store comparable growth in international regions was 7.1%. Although the growth rate still slowed by about 2 percentage points compared to the previous quarter, it was consistent with expectations. From a trend perspective, the same-store sales growth in the US has shown signs of continuous recovery since entering fiscal year 2024 after experiencing negative growth in the second half of fiscal year 2023.

2. As one of the new growth drivers, Costco's e-commerce sales grew by 13% year-on-year this quarter, a noticeable slowdown from the previous quarter's 19% growth and lower than 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 can contribute to some extent to overall growth. According to the company, the sales of gold and jewelry in the online retail category were the strongest, achieving double-digit growth.

3. 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 increase of 7.5%. The average payment price per member was $60 (annualized), which was roughly flat year-on-year.

The favorable price adjustment that took effect on September 1 this year (an average increase of $5 to $10) has not yet reflected in financial income. However, possibly due to the price increase and Costco's recent strengthening of measures against account sharing and enhanced verification of membership status, this quarter the membership renewal rates in both global and North American regions slightly decreased by 0.1 percentage points compared to the previous quarter. However, from a longer perspective, the current renewal rate remains at a high level compared to recent years 5. After reviewing the operational indicators and 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 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 a growth rate higher than 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 quarter-on-quarter.

1. 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%, a slight increase of 0.1 percentage points year-on-year, with an actual operating profit of $2.2 billion nearly in line with market expectations.

However, at the net profit level, 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%.

Dolphin Investment Research Perspective:

As mentioned earlier, Costco, as a mature company in a traditional industry, generally experiences limited fluctuations in performance, making it difficult to have major surprises or disappointments; it still excels in "stability" and "certainty." Excluding the unstable benefit of tax income, 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 a 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% for members; on the financial indicators, this quarter still shows high single-digit revenue growth + double-digit profit growth, which is undoubtedly commendable.

Although this may not attract investors seeking "growth." However, from a longer perspective, being able to consistently achieve "high single-digit revenue growth + 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 under conditions of ample funds and high optimistic sentiment, where funds seek certainty, seek to band together, and seek consistency This may have a certain degree of similarity to the situations of gold, Bitcoin, and even Tesla.

The following is a detailed commentary

1. Core retail excels in stability

1. Steady growth in customer traffic, stable prices

Starting from the most important 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. 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 season.

In terms of price and volume drivers, the 5.2% 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 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" (significant increase in per capita consumption) from 2021 to the first half of 2023 and the "deflation period" (negative growth in per capita consumption) in the second half of 2023, per capita consumption has remained flat year-on-year for nearly five consecutive quarters in the fiscal year 2024.

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

2. U.S. consumption is stable and improving, while international sales have declined

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 have significantly slowed down and underperformed 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 roughly in line with expectations.

From a trend perspective, there has indeed been a slowdown in growth in international regions and Canada since the fiscal year 2024. In contrast, 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 2024.

3. E-commerce growth continues to lead, but has slowed significantly

As a new growth driver in the post-pandemic era, Costco's e-commerce sales this quarter grew by 13% year-on-year, which is a noticeable slowdown from the 19% growth in the previous quarter and significantly lower than the market expectation of 14.1%. Excluding the impact of exchange rates did not make a significant difference Compared to the overall same-store growth of 5% to 6% for the group, the growth rate of e-commerce 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 stability 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.

II. Price increase benefits have yet to materialize, and renewal rates have slightly declined?

The membership fee revenue, which is relatively small but has a very high profit margin, was $1.16 billion this season, 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 paying 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 been 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, the renewal rates for members globally and in North America slightly declined by 0.1 percentage points this quarter. However, from a longer perspective, the current renewal rate remains at a high level compared to recent years.

III. Taxes and fees 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 unexpected increase in gross profit margin, which was 11.3% this season, 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 profit margin increased by 17 basis points year-on-year, mainly due to the optimization of the product structure in core commodity retail. And the benefits brought by the relative reduction in the cost of 2% cashback for premium members.**

In terms of expenses, Costco's total sales and management expenses for 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 expenditures slightly exceeding expectations by 2%. However, according to the company, the expansion of the expense ratio is mainly due to rising oil and gas prices; excluding the impact of oil and gas, the expense ratio remained basically flat quarter-on-quarter.

Due to the benefits of 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 year-on-year increase of 0.1 percentage points, which is very small. Therefore, the actual operating profit of $2.2 billion was 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, the actual net profit for this quarter was approximately 6% higher than the consensus expectation, reaching $1.8 billion, a year-on-year increase of 13.2%.

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

Excluding the impact of this part of the tax expenses, the year-on-year growth of net profit was 9.9%.

Source: Dolphin Investment Research, original title: "Costco: This is what it means to be a 'retail leader' that transcends cycles!"

Risk warning and disclaimer

The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk