Warehouse Clubs Lift Costco -- WSJ

By Sarah Nassauer

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 31, 2019).

Costco Wholesale Corp. booked another quarter of sales gains, boosted by increasing visits to its warehouse clubs as the retail giant tries to navigate the U.S.-China trade fight.

Comparable sales -- those in stores and through websites in operation for at least 12 months -- rose 5.6% in the quarter ended May 12. The gain excludes the effect of gasoline prices and currency fluctuations.

E-commerce sales rose 20% during the quarter. Costco offers some items on its website and has teamed with Instacart to offer same-day grocery deliveries. But it has kept its focus on getting shoppers to buy in bulk at its cavernous stores.

It is unclear how this month's tariff increase to 25% on around $200 billion worth on Chinese imports including bicycles, furniture and luggage will affect store prices or cost of goods, said Costco Chief Financial Officer Richard Galanti on a call with analysts Thursday.

Costco has brought in some imports early to reduce tariffs, reduced costs with some suppliers, cut orders for some goods and is looking at sourcing outside of China in some cases, he said. Price increases are being passed on to shoppers on some items.

"At the end of the day, prices will go up," said Mr. Galanti.

As many retailers struggle to adapt to shifting shopping habits online, Costco has fared well offering bulk products at lower prices to fee-paying members. Costco's primary source of profit is membership fees, allowing it to offer lower prices on goods, often undercutting competitors. The model tends to attract middle- and high-income shoppers. In the most recent quarter one shopper bought a $400,000 diamond ring, said Mr. Galanti.

But it is taking a comparatively cautious approach to online growth versus other retailers. Walmart Inc. and Target Corp. have invested heavily to speed online delivery and offer curbside pickup, but Costco doesn't have plans to offer groceries for online pickup in stores, said Mr. Galanti.

"We continue to look at it. We continue to scratch our head at it," he said. The chain is adding lockers to more stores so shoppers can pick up online orders this year, mostly for small, high-priced items, he said. "We still want to drive the customer to the warehouse."

Total revenue, including membership fees, rose to $34.74 billion in the quarter, up from $32.36 billion for the same period the previous year. Profits rose to $906 million, up from $750 million in the year-ago period.

Costco has added to its store base in recent years, particularly outside the U.S., which carries some risk, as well as some cost benefits including in health care, said Mr. Galanti. Costco's first Chinese store will open this summer in Shanghai, he said.

Write to Sarah Nassauer at sarah.nassauer@wsj.com

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May 31, 2019 02:47 ET (06:47 GMT)

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