Company thrives by remaining nimble, adapting

ISSAQUAH, Wash. — Costco Wholesale Corp., even more than most retailers, has a business model built around efficiency.

The company offers a limited selection of products, most of them available in only the most popular flavor, color or size, which results in high sales volumes and rapid inventory turns. Combined with the operating efficiencies achieved through volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, that approach allows the company to operate profitably at significantly lower gross margins than most other retailers.

Costco’s ability to make that formula work — despite the higher costs and logistical challenges imposed by the pandemic — has been impressive and inspiring. But more than that, the company has consistently managed to make a bare-bones shopping environment the setting for a voyage of discovery, a treasure hunt and an overall enjoyable experience for its members. When Forbes put together its inaugural Halo 100 ranking of the companies that best deliver the “experience that customers want to have,” Costco topped the list.

All the while, Costco has been generating strong financial returns and impressive growth.

For all those reasons, Costco is being recognized as MMR’s Retailer of the Year.

“In another year of uncertainty, Costco was steadfast in providing goods and services, remaining nimble, and adapting our business as needed to best serve our members and protect our employees,” president and chief executive officer Craig Jelinek wrote in a letter to shareholders published in the company’s annual report last month. “Despite ongoing pandemic challenges, we had another strong year in fiscal 2021. Net sales for the 52-week fiscal year totaled $192 billion, an increase of 18%, with a comparable-sales increase of 16%.”

Jelinek noted that net income for the fiscal year ended August 29 was $5 billion, or $11.27 per diluted share, an increase of 25%. Revenue from membership fees increased 9% to $3.9 billion.

Those results came despite the challenges Costco faced during fiscal 2021, which included global challenges in the supply of key commodities, transportation capacity and labor shortages. “Inflationary factors, such as higher labor and freight costs, greater transportation and container demand, and scarcity of certain products put pressure on pricing,” Jelinek said. “We worked with our suppliers to explore methods to control costs and avoid or minimize price increases when possible.”

The challenges have continued since then, and so has Costco’s strong performance.

Costco reported strong sales gains in the first quarter of fiscal 2022, which ended on November 21. Net sales for the first quarter increased 16.7%, to $49.42 billion, up from $42.35 billion in the same quarter last year.

Comparable sales in the United States increased 14.9% (9.9% when the effects of gasoline sales are excluded). For the whole company, comp-store sales increased 15% (9.8% when gasoline sales and foreign exchange rates changes are excluded).

Net income for the quarter was $1.32 billion, or $2.98 per diluted share, compared to $1.17 billion, or $2.62 per diluted share, last year.

Costco also had a good holiday season. The company reported net sales of $22.24 billion for the retail month of December (the five weeks that ended on January 2, 2022), an increase of 16.2% from $19.14 billion last year. For the 18 weeks ended January 2, the company reported net sales of $76.34 billion, an increase of 16.6% from the $65.47 billion recorded in the equivalent period last year.

Comparable sales increased 15.9% in the United States for the five-week period and 15.4% for the 18-week period. (Those numbers fall to 11.5% for the five-year period and 10.5% for the 18-week period when the impacts of changes in gasoline price changes and foreign currency exchange rates are excluded.

Total company comparable sales increased 14.5% for the five weeks and 14.9% for the 18 weeks (11.5% and 10.4%, respectively, when the impacts of gas prices and currency exchange are excluded).

One driver of Costco’s growth is its continued expansion.

“In fiscal 2021, we opened warehouses and business centers domestically and internationally, including 12 net new in the U.S., four net new in Canada, three in Japan, and one in Taiwan,” Jelinek noted in his report to shareholders. “The pandemic created challenges in opening buildings, and we expect the pace to increase in fiscal 2022.”

In fact, Costco opened 20 net new warehouse clubs in fiscal 2021, and added eight net new clubs in the first quarter of fiscal 2022, including the second Costco in France, the second one in China, and the fourth in Spain.

For the remainder of the year Costco plans to add 23 new units, four of them relocations, for a net increase of 19. That would result in an increase of 27 for the current full fiscal year.

Costco currently operates 828 warehouse clubs, including 572 in the United States and Puerto Rico, 105 in Canada, 40 in Mexico, 30 in Japan, 29 in the United Kingdom, 16 in Korea, 14 in Taiwan, 13 in Australia, four in Spain, two each in France and China, and one in Iceland.

Costco also operates e-commerce sites in the U.S., Canada, the United Kingdom, Mexico, Korea, Taiwan, Japan and Australia.

E-commerce has been another growth area, and one where analysts see a lot of potential.

During fiscal 2021 Costco’s websites worldwide recorded comparable-sales gains of 44% over the previous year.

“We continue to focus on complementing our core warehouse business with online offerings,” Jelinek noted in the company’s annual report. “Our acquisition of what we now call Costco Logistics has helped improve our delivery times and often lower delivery prices of big and bulky items. As a result, categories such as appliances, exercise equipment, furniture, mattresses and patio products contributed to sales growth this year, despite supply challenges. Other important advancements were achieved in our online business including reduced costs associated with picking items, the addition of frozen grocery two-day deliveries, and technology enhancements including a streamlined COVID-19 vaccine scheduler.”

Costco faces tough comparisons when it comes to e-commerce growth this year, given the strong gains driven by the pandemic last year. But comparable e-commerce sales still increased 14.3% in the first quarter of fiscal 2022, or 13.3% adjusted.

During the first quarter conference call with analysts, Costco chief financial officer Richard Galanti pointed out that Costco continues to improve its mobile app and its e-commerce website, and also has been adding e-commerce kiosks in the warehouse clubs that have video signage and easy touch screen ordering.

Costco is rolling out e-commerce lockers as well, he said. “Currently in the U.S., we have 112 locations, and we plan to more than double that number in 2022.”

Another asset helping to drive Costco’s performance is its Kirkland Signature brand, an own brand the company says has become synonymous with higher quality and exceptional value, with strong growth worldwide.

Sales of Kirkland Signature brand products exceeded $59 billion in fiscal 2021, compared to $52 billion in the prior year.

“We focused on driving down costs, improving quality, expanding in-country sourcing options, reducing the environmental impact of transportation, and introducing new and exciting products,” Jelinek said.