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Mining the Positives from Costco’s Fiscal 3Q16 Earnings

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Merchandising category performance

Costco’s (COST) retail comps (RTH) performance in fiscal 3Q16 was relatively healthy for most merchandising categories. The strongest performance was reported in hardlines, particularly in sporting goods, toys, automotive, seasonal, consumer electronics, and garden and patio.[1. Based on comments by Richard Galanti, CFO of Costco]

Costco’s rivals Walmart (WMT) and Target (TGT) also reported above-average performance in toys, apparel, and home improvement. However, similar to a lot of retailers (XRT) (XLY), Target faces a challenged market for consumer electronics due to secular factors affecting the industry.

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Upside from e-commerce sales growth

Costco also reported better-than-average growth in e-commerce sales. Costco’s online sales grew by 14% year-over-year on a reported basis and by 13% on a comparable basis. In currency-neutral terms, Costco’s web sales were up by 15.5% in fiscal 3Q16. In contrast, rivals Walmart[2. In constant-currency terms] and Target grew their online sales by 7% and 23%, respectively, in their most recent quarters.

Costco has partnered with online delivery services like Google Express, InstaCart, and Jet.com to make its private-label brand Kirkland Signature and other Costco products available through these channels. This could provide the retailer with some advantages. Costco would be able to serve customers in a wider geographical area, as well as keep its distribution-related capex low.

Costco has been also steadily adding new international markets over the past few quarters. Costco’s online portal now serves six markets, and the company added Korea and Taiwan this fiscal year. Costco also has a presence on Alibaba’s (BABA) Tmall Global portal, making its products available in China.

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