How Costco’ Margins Fared in Fiscal 1Q18

Similar to peers, Costco Wholesale (COST) saw its margins pressured in fiscal 1Q18. Increased investments in growth initiatives and lower pricing to fend off competition from Amazon (AMZN) in the grocery space are taking a toll on the profitability of mass US (SPY) merchandisers. Whereas rising digital sales and fulfillment costs have dragged down their performance, currency rates and store traffic have boosted their margins.

Costco’s gross margin narrowed 33 basis points in fiscal 1Q18 to 11.2%, reflecting lower fresh food and hardline sales partially offset by an increase in sales of softlines, food, and sundries. The company’s margins benefited from gasoline price inflation, currency rates, and savings from Citi’s cobranded Costco anywhere Visa card. Strong sales further supported profitability. However, price investments, hurricanes, and promotions hindered margins.

In comparison, Walmart’s (WMT) gross margin narrowed 29 basis points in fiscal 3Q18, reflecting lower pricing and an adverse mix, and Target’s (TGT) margin contracted ten basis points due to promotions, price investments, and digital fulfillment charges.

Costco’s operating margin remained muted at 3.1%, contracting slightly year-over-year. The company’s SG&A (selling, general, and administrative) expenses as a percentage of sales fell 34 basis points. However, narrower gross margins and business investments more than offset the lower SG&A expenses.