What's going on?
Discount retailer Costco reported better-than expected results late last week.
What does this mean?
Investors came into Costco’s update with trepidation, not least because Walmart’s disappointing earnings update and bleak outlook highlighted just how much US shoppers have been cutting back. But Costco has a couple of advantages over its rival. For one, its average shopper earns a lot more, so they haven’t had to watch the pennies as much. And for another, the retailer has made a point of keeping its gas prices several cents below the national average. That’s not just driven traffic to its forecourts: analysts estimate that as many as half those customers end up buying other products in store. All this fell together nicely last quarter, helping Costco bring in $1 billion more revenue than expected and keeping the retailer on track for its first $200 billion financial year (tweet this).
Why should I care?
For markets: Business 101: make money.
So it breaks our heart to say that Costco’s shares still dropped after the announcement, which might have something to do with the fact that Costco’s profit margin – already lower than most of its rivals – fell last quarter. That means the company’s one step closer to crossing the line between making money and losing it, which is probably the wrong direction to go in. But Costco’s not taking this lying down: it said it’s increasing some product prices to try to offset the damage.
Zooming out: Cheaply does it.
Costco wasn’t the only discounter to report strong results last week, with Dollar General and Dollar Tree posting impressive quarterly results. They both pointed out that spending on nice-to-haves has been dropping off, and that food is making up a bigger proportion of Americans’ weekly shop. But a tight-fisted customer is their kind of customer, so they’re taking full advantage: they both have plans to open up new stores.