A more cost-conscious consumer created challenges for Costco (COST, Financial) in Q4 2024, leading to a slight revenue shortfall. However, the company still demonstrated strong performance, outpacing most retailers. This is evident from Costco's impressive +6.9% comp (excluding gas and FX), driven mainly by a 6.4% increase in traffic. Notably, this growth in shopping frequency occurred even as gas prices decreased, reducing a key traffic driver.
While lower gas prices and softness in non-food categories like home and furniture contributed to the modest revenue miss, there were several positives:
- Costco's focus on enhancing digital capabilities paid off, with an adjusted eCommerce comp of +19.5%. Improvements in delivery times, product assortment, and scheduling functionalities, along with enhancements to the mobile app and website, boosted digital sales.
- Demand for gold bars and silver bullion remained strong in Q4, driving eCommerce growth. Gold and jewelry sales saw double-digit increases, as did discretionary categories like toys, gift cards, tires, home furnishings, and health and beauty.
- Membership growth was robust at +7.3%, reaching 76.2 million paid household members. Membership fee income rose slightly by 0.2% to $1.512 billion, though it missed analysts' expectations due to FX-related headwinds that reduced income by 0.9%.
- The recent membership fee increase, effective September 1, did not impact Q4 results but will be significant in FY25. CFO Gary Millerchip noted that the fee increase will minimally impact early FY25 due to deferred accounting, with most benefits seen in the latter half of the year and into FY26. He also emphasized Costco's commitment to investing in its employees, highlighted by a July wage increase.
Despite the small revenue miss, Costco delivered a solid earnings report. The stock, with a 1-year forward P/E above 50x, is expensive and requires continued high performance to justify its valuation. With the membership fee increase and potential improvements in consumer spending as interest rates decline, Costco is expected to remain a top-tier retailer.
