Business

Costco says it’s working to sharpen online shopping capabilities

Customers come and go from the new Costco on West Bakerview Road during the grand opening on Saturday, Nov. 19, in Bellingham.
Customers come and go from the new Costco on West Bakerview Road during the grand opening on Saturday, Nov. 19, in Bellingham. eabell@bhamherald.com

After Costco Wholesale missed Wall Street’s expectations for earnings and revenue Wednesday, analysts peppered company executives with questions about how it will battle increasing competition from online retailers.

For the quarter ended Nov. 20, the Issaquah-based warehouse giant reported adjusted earnings per share of $1.17, up 7.3 percent from $1.09 year-over-year. That fell short of the $1.19 in adjusted earnings that Wall Street analysts had been expecting, according to a Zacks consensus estimate.

Without the adjustment of 7 cents per share, attributed to a nonrecurring $51 million legal settlement, the company reported earnings per share of $1.24.

Total revenue, including membership fees, also came in below expectations at $28.1 billion, an increase of 3.2 percent from $27.22 billion last year. The company logged $27.47 billion in net sales and $630 million in membership fees.

But analysts had expected revenue of $28.38 billion, according to Zacks.

In a conference call, Richard Galanti, Costco’s chief financial officer, attributed the shortfall on factors including deflationary prices and lower profits from gas sales.

On a slightly brighter note, so-called comparable sales – sales at stores open at least a year – was up 1 percent companywide in the first quarter. That measure was flat last quarter, and down 1 percent in the year-ago quarter.

We think we can and should do a lot more online. But we also want to get people into the warehouses

Richard Galanti, Costco’s chief financial officer

Excluding the effects of changing gas prices and foreign exchange, though, comparable sales companywide went up only 2 percent, compared to 3 percent last quarter and 6 percent year-over-year.

Galanti, though, said he was encouraged that traffic picked up toward the end of the first quarter and into the current quarter.

“Traffic has seemed to hit a trough and come back a little,” he said during the conference call after the earnings release.

The company’s switch from American Express to Citigroup for its co-branded cards, which took place in June, is working out well for Costco, with the company already benefiting from lower merchant fees, Galanti said.

But the Wall Street analysts seemed most interested in what Costco was doing to improve the online shopping experience for its customers, especially given concerns about overlap between Amazon Prime member households and Costco member households.

Galanti acknowledged that the company had probably been “a little stubborn along the way” and that “there are some things we perhaps should have done earlier.”

But Costco is making improvements to its online shopping experience, including making search easier, improving the return process, bettering members’ ability to track their orders, and increasing the number of depots from which orders can be fulfilled, resulting in “closer, faster and less expensive delivery,” Galanti said.

“We think we can and should do a lot more online. But we also want to get people into the warehouses,” he said. “We think some of the things we do in the stores will keep them coming.”

The company has partnered with delivery services such as Instacart and Google Express in the Bay Area for customers who want to shop online and get their purchases delivered quickly. But Costco found that loyal members bought less when they shop online than when they walk in and that they come in to physical stores a few times less per year, Galanti said.

Of Amazon’s buzz-creating news this week that it would be opening a grocery store next year that doesn’t employ cashiers or checkouts, Galanti said he expects there would be a lot of retailers more affected by it than Costco.

A bright spot for the warehouse giant: The average age of a Costco member is now two years older than the general population, down from four years older a few years ago. “We’re encouraged when we look at the number of millennials signing up,” Galanti said.

Costco shares were up 1.4 percent, to $156.01 in after-hours trading Wednesday. Its closing price of $153.85 was down 8 percent from $167.12 a year ago.

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