• Jeff Matthews

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 Costco.com, 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.

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GENERAL

The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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