Last week, Costco Wholesale reported a second straight quarter of strong profit growth. Earnings per share for the first quarterof Costco's fiscal 2015 rose from $0.96 to $1.12 as comparable-store sales increased 5% (or 7% excluding the negative impact of foreign exchange fluctuations and gasoline price deflation).
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Following the earnings announcement, longtime Costco CFO Richard Galanti spent more than an hour talking to financial analysts about Costco's results and business trends. Here are five key points he emphasized during the conference call.
Lower gas prices boost gross margin
"Within gross margin, which was higher year over year in the first quarter by 22 basis points, we benefited from strong margins in our gasoline business."
Solid sales growth was the primary driver of Costco's earnings increase last quarter, though gross margin actually declined slightly in Costco's core business. A large part of Costco's 22-basis-point gross margin boost last quarterwas attributable to gasoline asthe company saw a large benefit from falling fuel prices. Most Costco locations have gas stations, and gasoline represents more than 10% of the retailer's total sales volume.Falling fuel prices probably boosted earnings by tens of millions of dollars.
When the wholesale price for gasoline falls, Costco soon passes those savings on to customers. However, it's not an immediate effect. As a result, when gasoline prices fall as much as they did last quarter, the modest lag in conveying those savings to shoppers creates a gross margin tailwind for Costco.
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But let's not forget that this portion of Costco's earnings growth is not exactly sustainable.
Steady growth continues
"For all of fiscal '15, however, we have a current plan of 31 new locations, 18 of which will be in the U.S., three each in Japan and Mexico, two each in Australia and Korea, and one each in Canada, U.K., and Taiwan."
Costco has been growing its warehouse square footage by about 5% annually in recent years.In fiscal 2014, it opened 29 new warehouses, and it plans to open 31 in fiscal 2015.However, two-thirds of the planned openings are scheduled for the last 16 weeks of the fiscal year, so there's a good chance a few will slip into fiscal 2016.
Overall, Costco's growth trajectory is very encouraging. In May 2013, Galanti told investors the company planned to open about 150 new warehouses in the following five years, with 55 in the U.S. and the rest in international markets.
So far, Costco is right on target, but it is opening more warehouses in the U.S. than in other countries. If Costco can still profitably add locations in its No. 1 market, it probably has an even bigger future growth opportunity abroad.
Ramping up e-commerce sales
"For the quarter, sales and profit were up over the year. E-commerce sales were up 20%, up 19% on a comp basis, and up 21% excluding FX."
Costco has made significant investments in e-commerce in the past few years. It has upgraded its mobile apps to catch up with more Internet-savvy competitors, added items to its online selection, and opened e-commerce operations in additional countries.
In the past year or so, the company has also tested new delivery partnerships. For example, it is one of the top merchants for Google Express, which offers same-day delivery in a small but growing number of markets. These initiatives have helped Costco sustain a strong 20% growth rate in e-commerce sales.
Growth in China coming -- eventually
"And we recognize [China is] a giant market. ... So it will be at some point, I don't know when. If you said what's the likelihood in the next five to 10 years? Sure. Next two to five years? Maybe. Next Thursday? We're not ready yet."
Costco has made a significant move into Asia in the past few years, growing rapidly in Japan, South Korea, and Taiwan. In October, it announced that it would open an online store in China through Alibaba's Tmall platform. Costco now sells about 120-130 bulk items through Tmall, primarily in the food and sundries category.
Selling through Tmall will allow Costco to slowly start building its brand awareness in China. That could eventually pave the way for it to open warehouses in the nation. Costco probably won't be ready to take that plunge for a few more years, but management definitely sees China as a viable long-term growth opportunity.
Higher buybacks and dividends could be on the way
"Our board discusses [buybacks and dividends] every quarterly board meeting. I think we want to be more systematic, but I can't say when it will be."
Costco has about $7.6 billion in cash and investments on its balance sheet. Some of that is held outside the United States, but Costco recently repatriated more than $1 billionin cash from Canada to the U.S.
This, along with Costco's steady cash flow, gives the company plenty of flexibility to increase its dividend or buy back more stock. Galanti suggested the company wants to take a more systematic approach to buybacks, rather than buying a little here and a little there.
That said, Costco plans to move deliberately on this front. Galanti emphasized that the retailer will prioritize capital investments that can drive growth over returning capital to shareholders. Fortunately, it looks like there will be enough cash to do both.
The article 5 Things Costco Wholesale Corporation's Management Wants You to Know originally appeared on Fool.com.
Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale, Google (A shares), and Google (C shares). The Motley Fool owns shares of Costco Wholesale, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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