Costco Could Disappoint on Margins in 1Q18
Gross margins could remain pressured
Analysts expect Costco (COST) to report lower gross margins in fiscal 1Q18. The company’s value pricing and higher investments in growth initiatives are projected to take a toll on its gross margin. Mass merchandisers continue to invest in price to drive store traffic amid growing competition from Amazon (AMZN) and other discount chains, which impacts their margins. Increased investments in the digital arm also pressure their margins.
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Costco’s growth initiatives are expected to be funded by higher membership fee income due to a rise in the membership fee and higher cost savings. Increased sales also support margin growth. However, price investments are expected to remain a drag. Costco’s investments in strengthening its online delivery mechanism could dent its margins.
During the last reported quarter, Costco introduced a few online delivery services. It offers two-day free delivery of non-perishable items. Costco announced the expansion of its same-day delivery for fresh groceries in partnership with Instacart.
Costco’s operating margin is expected to remain soft or improve slightly due to higher sales and lower SG&A (selling, general, and administrative) expenses.
Revisiting last quarter
During the last reported quarter, the company’s gross margin fell by 15 basis points. Increased price investments more than offset the leverage from higher sales and lower costs. However, the operating margin improved marginally due to lower SG&A costs.
Walmart (WMT) and Target (TGT) also disappointed on the margins front. Walmart’s gross margin fell by 29 basis points, while its operating margin fell by 50 basis points in fiscal 3Q18. Target’s gross margin fell by 10 basis points, while its EBIT margins fell by 120 basis points in 3Q17.