COST

Costco's E-Commerce Sales are Soaring. What Investors Need to Know.

Costco Wholesale (NASDAQ: COST) stands alone among major national retailers in the fact that it issues monthly sales updates in between its comprehensive quarterly announcements. This report doesn't tell investors anything about how well the company did in generating profits. It also contains no data on customer traffic trends or on key engagement metrics such as membership renewals.

But the report is still worth watching for its timely look at sales trends. Investors can sometimes spot early signs of shifting demand well before Costco announces its full quarterly update, too.

With that big picture in mind, let's look at the chain's January sales report that was published on Feb. 7. This update included good news around growth and some encouraging signs of increased cash flow on the way.

Sales trends

Costco revealed that comparable-store sales were up 3% overall and rose 2% in the core U.S. market after adjusting for currency exchange rate swings and shifts in gasoline prices. At first glance, that broader update might seem like a disappointment given that comps were up 8% in the prior month.

Yet there was a quirk in the calendar this year that shifted one big shopping day out of January and into December. Zooming out helps adjust for that shift, which lifted sales by about 3% in December while reducing them by the same amount in January. Comps trends are holding steady at an impressive 5% rate after accounting for this shift. In other words, Costco's positive 2023 momentum is extending into the new fiscal year.

The e-commerce segment

There is one segment of Costco's business that is undeniably booming right now: e-commerce. This division soared by 21% in January compared to a 17% increase in the prior month.

That's great news for shareholders for several reasons. Costco's e-commerce segment tilts heavily toward discretionary purchases like home furnishings, gold bars, jewelry, and consumer electronics, after all. Shoppers had been stepping back from these nonessentials for most of 2023 in response to rising inflation. But consumers appear to be more ready to splurge again.

That means Costco could see higher customer traffic in 2024 and perhaps a quicker pace of rising average spending. Both factors would likely boost shareholder returns while keeping the warehouse giant at the top of its industry.

Don't expect a profit jump

Investors shouldn't expect Costco's higher consumer discretionary sales to boost its profit margin, as it might with rivals like Target. Target blamed weaker demand in these niches for its collapsing operating profits through most of last year. Yet Costco didnt reporta similar profitability drop in 2023 and likely won't reveal an uptick this year.

That's because management chooses to direct essentially all excess profits into extending Costco's price leadership. It also helps explain why the chain's operating profit has held steady at about 3% of sales through several wild consumer demand swings over the past five years. In contrast, Target's profitability jumped from 6% to nearly 10% in that period, before slumping to 3%.

That's not to say that higher e-commerce sales are unimportant. The extra cash from those sales will help the chain reduce prices on consumer essentials so that shoppers have more incentive to frequent its stores. As a result, look for improvements in Costco's renewal rate, sales growth, and customer traffic into early 2024.

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Demitri Kalogeropoulos has positions in Costco Wholesale. The Motley Fool has positions in and recommends Costco Wholesale and Target. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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