COSTCO RESULTS SHOW A MAGNITUDE OF COMPETITION

COSTCO SHOWS EXCEPTIONAL SUCCESS WITH CONTROL OF COSTS

 

 

Aside from GDP and Durable Goods orders, yesterday also saw the release of the ICSC-Goldman Store Sales report. This report monitors the weekly and yearly same store sales at major retail chains. For the week of February 25, sales declined -1.0% resulting in a year over year gain of 2.7%. Last week, the numbers showed a 3.0% weekly gain with the yearly gain at 3.2%.

So far this year, the ICSC-Goldman report shows bouncing weekly figures and a yearly figure that can’t seem to sustain above 3%. Drawing from such results is a lingering weakness in the nondurable goods portion of the GPD commented upon here in “GDP, Durable Goods, Finding Business Cycles.”

Also reporting yesterday was Costco. When macroeconomic conditions are difficult for retail, some companies compete better than others. Recently, in “Target Corp.: Shop There, Invest There?”, I looked at Target’s operations in this challenging environment. Where Target’s sales increased by 3.3%, profits fell by 5%. A phenomenon apparently associated with Target’s model of increasing prices, increasing operational costs, and reduced traffic.

 

 

Costco offers a counter view where they keep prices low, control operating costs and make money. They also increase their same store sales (stores open for a year or more) results at impressive rates.

COSTCO’S EXCEPTIONAL COST MANAGEMENT, AND VALUE TO CUSTOMERS

 

What is remarkable about Costco is their control over operating costs. While SG&A expenses tend not to be that flexible or dynamic as a general matter, Costco can adjust this expense item to parallel sales.

  

Looking at Costco’s income statement reflected on the table to the left, one is again reminded of a good way to read operational efficiency. Once pointed out on this site is the metric Walmart identifies in its SEC filings.

According to the metric, one looks firstly to see if a company is controlling operating expenses such that net sales exceed operating expenses. Then, is the company growing operating income (EBITDA) faster than net sales.

Throughout Costco’s income statement, one can see an uncanny ability to control operating expenses. Starting with, for example Q1 2011, sales fell by -20.25%, but SG&A costs fell by practically an almost equal amount. That being  -19.16%, a rare occurrence anywhere.

Q2 and Q3 were nearly identical quarters with all things essentially even. The surprise is that after sales dropped by -20.25%, sales then ticked up by 7.19%. Against a deep sales drop and deep rise rise, SG&A grew at a meager 2.58%.

 

A constant with Costco is dropping SG&A expenses when sales drop. Even if the sales drop is deep, Costco has magically managed to equally drop operational costs….sequentially. When Costco finds increased sales, their habit is to suppress operational expense below their increase in sales. A very good thing.

Certainly Costco's results meet a first criteria of operational efficiency. When increases are being realized in food and fuel, Costco can manage the overhead and bring value to the customer.

What about increasing operations' income at a faster rate than sales? In today’s environment, such a metric betrays increasing costs, witnessed through nearly all companies. When cost of goods or materials impinge deeply on margins, raising operating income faster than sales takes a shadow to managing rising costs of goods and materials. Costco has recognized this and moves well through its course.

Margins for Costco might be slim, but they have stability. Costco’s margins are stable due to a stable business model of actually passing savings onto the consumer. Like Walmart, Costco delivers value. Unlike Walmart, let alone Target, Costco has a method of controlling operational expenses rare to  be witnessed through business.

MEMBERSHIP HAS ITS VALUE

Given commentary on Costco, we have the membership aspect to consider in this analysis. It brings money to be sure, but at a rate that increases Same Store Sales, revenue and the ability for a consumer to add value to any purchase versus other stores.

In 2011, Costco grew their membership into a major means of organic growth, in keeping with the past.

Quarter over quarter (read left to right), the side table, based on SEC data, shows that Same Store Sales are growing faster than actual numbers of members. Moreover, membership fees are rising faster than the actual numbers of membership growth.


Basically, data shows sales increasing from existing members. At the same time, the rate of increase in membership fees have slowed, while the rate of actual member numbers have slowed…..ALL against a strong organic growth in sales.

In the macroeconomic environment, Costco is dynamic and fluid. Very capable of returning value to investors, who can take comfort in Costco’s stable performance.