Friday, December 12, 2008

The Consumer Trade Down, Costco-Style

Costco, being one of the best run retailers on the planet, ranks at the top of our list for earnings conference calls, when it comes to getting a handle on what is happening out in the real world.

And yesterday’s call did not disappoint, at least as far as getting a handle goes. As to what is happening out there…well, it’s a downer.

Here’s CFO Richard Galanti, courtesy of the indispensible StreetEvents, highlighting one of the most disturbing developments during the quarter:

…one of the other things that jumped out at us was health care costs. Particularly during the month of October and into early November, and in talking to our third party administrators of the plan, they said they have seen this a lot of places around the country and putting two and two together myself, it's almost in sync with the stock market decline that we saw health care costs go up dramatically above and beyond what you see at the end of the calendar year anyway when people have just -- they have already hit their deductibles and they want to make sure they get their free eye exam in or their teeth cleaning.

As far as trends during the last three months (ending November), Galanti had this to say:

…the trend during the quarter of weaker comps are mostly on the non-food side of our business. Needless to say, that hit earnings as well as the trend line from September to October to November was slightly down each quarter, the underlying comps. And with those weaker sales results, I might add those were despite more aggressive pricing, conscious effort on our part, to drive sales during the quarter.

How much “more aggressive” was pricing? Here’s a mind-blowing observation about television sales during the quarter:

…our television sales have been way up in November. [W]e had unit sales up over 50% in the four weeks, but that translated into a dollar sales increase of only 3%.

Yes, he did say that: television unit sales were up 50% in November—but dollar sales were up only 3%.
Here’s why:

If you go onto, you can see that we're selling two packs of flat screen televisions for less than $1500 for the both of them.
And so…notwithstanding what's going on in the economy and with big ticket items, we have taken advantage and been opportunistic and going to vendors that have been stuck with inventory when other cancellations have occurred elsewhere and taking advantage of that.

That’s what good companies can do: take advantage of bad companies when things get rough.

And they are rough.

The few bright spots in Costco’s sales came not in the fun stuff you look for at the wholesale clubs while you’re loading up on oversized detergent and giant boxes of raspberries and bags of frozen shrimp—not iPods or digital cameras, say.

No, it is in the basics where Costco’s business is booming:

In terms of merchandise categories for the quarter, within food and sundries, which is about half our business…virtually all sub categories were up year-over-year with groceries, canned goods and what have you being the strongest comp in the mid teens.

Canned goods and half-priced television sets—the new economy, available at Costco.

Jeff Matthews
I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews.
Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.


Mark B. Spiegel said...

As a long-time Manhattan dweller, I'm an all-too-rare visitor to Costco (the existence of which is one of the truly great perks of suburbia). However, I had the privilege of meeting and speaking with Jim Sinegal (the company's co-founder and CEO) a couple of years ago, and found him to be one of the most humble (as in, "entourage-free") and straightforward CEOs I've met from ANY company, much less one with a market cap north of $20 billion.

By the way, I love the concept of the flat-screen TV "two-pack"... For better or worse (and currently, that kind of frivolous imported consumption is probably "for worse"): Only in America!

Anonymous said...

Jeff said: "Canned goods and half-priced television sets—the new economy, available at Costco."

I don't want to pop your retail bubble of what is normal or not, but Costco made its business by doing exactly that during non recession times as well. Although now, it is done with low price consumer and business hardware subsidized by a whopping $50 a year subscription fee enhanced by the continued increase of the average unit package cost. Now around $7.50 to $10, up from what used to be unit packaging under $5.

While advantaging massive product volume buy opportunities out there, they have been able to leverage an increase in basic retail pricing against the lower purchase prices due to the economy.

But my point is that the reduced television costs is just what Costco has always done as a company, maybe more so in products like business printers or coffee, but certainly since the opportunity exists, they are indeed leveraging the lower priced TVs too.

DaveinHackensack said...

My local Costco seems to be booming. I wonder how Costco's sales of other company's gift cards are doing. I've been buying the $100 in Starbucks cards available at Costco for $79.99, along with Costco's similar deal on McCormick & Schmick's cards (except with the M&S deal, they throw in a free cookbook).

Anonymous said...

Costco is the perfect velocity-driven retailers for disinflation or deflationary times. This is where they accelerate their business.

Anonymous said...

Well I bought one of thoose Visio 37in. tv's in November. Great buy, great picture for the buck. I bought it from the review I read in Barron's. Another thing I saw on Friday 12Nov. at the Costco in Montgomeryville,PA at 3:30pm was the many customers. Costco definately has customers, and they do buy stuff.

Brent Tharp said...

Not that it changes the thrust of CostCo's comments, as the magnitude of change is still significant, but the televisions are not "half-priced" if there are 50% more units sold but only a 5% increase in revenue. They are reduced by 30%, or roughly "a third off."

Anonymous said...

One remarkable thing i'm seeing consistent with Costco is the significant volume of cars in the parking lot. Although the parking lot remains full, i was perplexed as i kept walking into the stores and noticed the lines are much shorter.

I attribute this to a reduction in loitering at Costco. People are buying just the items they need and are then leaving, making the trip through the line and out the door a speedier process for the shoppers.

This has me wondering if Costco (famous for their re-shuffling of their shelves) will end up dispersing more of their non-perishable products among their food items.

Anonymous said...

The TVs weren't half price. The average selling price per unit dropped 31.3% over the year.