Costco: Digging Deeper Into December Sales

| About: Costco Wholesale (COST)

Summary

U.S. comparable sales appears to be on the uptick over the last few months aiding net sales.

Strength in Canadian segment and CAD helped to offset International segment forex impact.

Looking ahead, the Canadian segment could continue to offset forex headwinds in International segment. A return to gasoline inflation and increase in U.S. comparable sales could help January sales.

Comparable sales at Costco (NASDAQ: COST) picked up in the month of December and coupled with the expansion strategy helped post about a 4.9 percent increase in net sales in tough environments over a similar period last year. Let's take a deeper look at what influenced December sales numbers and what it could mean for the company's January sales moving forward. Readers interested in tailwinds that could aid net sales numbers could consider reading about potential catalysts for Costco.

December Sales and Recent Sales Performance

Note: Data presented in this section have been obtained from Costco's sales news release and can be found here.

Costco reported December sales results on January 4th, 2017. Net sales increased to $13.07 billion from $12.46 billion during the similar period last year, an increase of about 4.9 percent.

Comparable sales including the impact of foreign exchange and gasoline were as follows:

  • U.S.: 3 percent
  • Canada: 7 percent
  • International segment: -3 percent
  • Total company: 3 percent

Comparable sales excluding the impact of foreign exchange were as follows:

  • U.S.: 3 percent
  • Canada: 4 percent
  • International segment: 4 percent
  • Total company: 3 percent

The biggest positive here is the jump in U.S. comparable sales. After showing flattish trends for most of the year, it appears to be picking up over the last three months. This is good considering that the values include only a small inflationary impact of gasoline. Figure 1, shows the comparable sales figures by operating region segment for each month since December 2015. Forex impact on December sales is seen almost neutral with the Canadian segment benefiting from appreciation of the CAD, while the benefit is offset by the International segment due to weakness in the Mexican Peso and GBP mainly. The net result was a decent increase of about 3 percent in total company comparable sales, which helped increase net sales for the month.

Figure 2, shows the company total comparable sales and net sales change over the same period. Costco has added 25 new warehouses compared to the similar period last year (18 in the U.S., 4 in Canada, 1 in the U.K., 1 in Japan, and 1 in Taiwan). This helped drive the rest of the growth in sales.

Figure 1: Comparable sales by segment. Includes impact of gasoline and forex changes. Data taken from sales news releases on Costco's investor relations website.

Figure 2: Total company comparable sales and net sales change. Includes impact of gasoline and forex changes. Data taken from sales news releases on Costco's investor relations website.

Comparable sales excluding the impact of gasoline and forex provides a look at how the company performed on a constant currency basis. This information is provided in Figure 3. The total company comparable sales excluding forex and gasoline has trended down between 1 to 2 percent during the latter half of the year, compared to a range of 3 to 5 percent in the first half of 2016. Costco has attributed this mostly to deflationary trends in many of its core merchandising categories. However, over the last three months, U.S. comparable sales are showing signs of improvement along with the international segment, while the Canadian segment appears to be stabilizing. A more detailed view of revenue by segment can be found in the potential catalysts article.

Figure 3: Comparable sales by segment and total. Excludes impact of gasoline and forex changes. Data taken from sales news releases on Costco's investor relations website.

December Sales - Information from recorded call

Note: The information provided in the section below are paraphrased from a pre-recorded telephone message. Information on how to listen to the message can be found in the Costco Press Release.

Highlights from the pre-recorded telephone message are presented here.

Impact of cannibalization on total sales: Negative 50 basis points.

Impact of cannibalization in Canada: Negative 200 basis points due to the opening 3 warehouse in areas with existing warehouses.

Impact in International segments: Negative 50 basis points.

Comparable sales highlights by merchandise categories (excludes the impact of forex)

Food and sundries: Slightly positive comparable sales. Strongest departments were reported as liquor, deli, and food.

Tobacco comparable sales: Negative 17 percent year over year. Reported negative impact to comparable sales in food and sundries was 1 percent and to total company comparable sales was 0.5 percent.

Hardlines: Mid-single digit growth in comparable sales. Better performing departments were reported as tires, hardware, garden, toys, and sporting goods.

Consumer electronics was reported to having slightly positive comparable sales. Reported TV sales was down about 2 percent due to deflation which was offset by higher sales in appliances, audio, and computer sales.

Softlines: Mid-single digit growth in comparable sales. Better performing departments were reported as apparel, jewelry, and small appliances.

Fresh Foods: Low to mid-single digit growth in comparable sales. Service deli and meats were reported as the best performing departments.

Costco continued to see deflation in multiple categories.

  • Multiple departments in Food and Sundries
  • Consumer electronics in Hardlines.
  • Deli and meat in Fresh Foods.

The number of units per basket in the U.S. was reported to be higher. The average value of each basket was reported down 2 percent in USD. These metrics exclude gasoline, tobacco, and ancillary businesses.

Gasoline, hearing-aid, photo, and optical departments were reported to have had the best comparable sales increase in ancillary businesses.

Gasoline prices: Average sales price of gasoline up nearly 4.4 percent compared to the similar period last year.

Comparable traffic or frequency: Up 2 percent overall and up 3 percent in the U.S.

Average transaction: Up approximately 0.75 percent.

January Sales Outlook

Despite deflationary trends, Costco saw positive comparable sales growth even though the net foreign exchange impact appears to have cancelled out between the Canadian and International segments. Showing strength in a tough environment showcases the strength of the Costco business model.

If gasoline prices stay at or near current levels, January comparable sales is set to benefit positively from an uptick in gasoline sales revenue. However, the impact of gasoline sales increase on net profit is uncertain.

On the forex side, the Canadian segment should see continued tailwinds as the CAD is stronger compared to the same period last year. As of January 6th 2017, the currency had appreciated approximately five percent compared to the closing price at the end of January 2016 against the USD. Additionally, comparable sales excluding forex impact in the Canadian segment have stabilized around 4 percent. Coupled with the forex tailwind, this could provide a nice boost to comparable sales.

The international segment may continue to prove to be a drag with the Mexican and U.K. segments likely to contribute to most of the decline. Even though strength is seen in the U.K. and Mexican segments, forex impact will likely keep contribution to comparable sales down in these regions for now. The Japanese segment might show neutral to slightly positive impact on comparable sales. Strength in the Canadian segment will likely help offset woes in the International segment.

If the strong comparable sales increase, particularly in the U.S. carries into January, sales growth could climb north of 5 percent. This could boost the stock. Costco is scheduled to report January sales on February 1st, 2017.

Note: Outlook opinions given above are based on current forex prices. These are subject to high volatility and are best examined closer to the end of the period.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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