Costco CEO’s cautious consumer outlook justifies our near-term view on the stock
Kevin Colleran
Craig Jelinek, chief executive officer of Club holding Costco (COST), said Monday he sees a more-vigilant consumer this holiday shopping season and potentially beyond. However, he also said inflation is generally trending in the right direction, a development that’s good for the U.S. economy over the long term. “Overall, it’s probably not one of the most exciting Christmases I’ve ever dealt with, and I think that has a lot to do with the consumer being careful going into next year,” Jelinek said in a CNBC interview. We tend to look to Costco as a barometer for the economy since it sells such a wide variety of goods and services to its nearly 121 million cardholders. Bottom line Jelinek painted a mixed picture Monday, sounding more cautious on the consumer than some may have expected — especially when it comes to purchasing bigger-ticket items like furniture, high-end TVs and jewelry. At the same time, the retail CEO had mostly favorable things to say on inflation easing and sales in some categories including its private-label Kirkland Signature brand. We left the interview believing our cautious stance on retail stocks remains justified. Costco is one of just two in our portfolio along with TJX Companies (TJX), an off-price retailer that benefits from the industry’s inventory glut and bargain-seeking shoppers. TJX is the company behind the T.J. Maxx, Marshalls and HomeGoods stores. Costco similarly benefits as more consumers want a reprieve from an inflationary environment, so they turn to a company with a proven value-oriented ethos. “We’re the price police,” Jelinek told CNBC, saying Costco is “absolutely” trying to negotiate with its suppliers to roll back increases that were implemented during the pandemic. “You pay to shop with us. Our job is to lower prices,” he said. Costco members believe it makes good on that promise — U.S. and Canada membership renewal rates were 92.5% at the end of its fiscal first quarter, and worldwide renewal rates stood at 90.4%. While these numbers support our investment in Costco long-term, we do not ignore the economic realities and potential for a slowdown in comparable sales growth, an important metric in the retail industry. This is why we booked some profits in the name earlier this month , before Costco released mixed fiscal Q1 numbers. What Jelinek said Monday also reinforces that belief. Down the road, the potential for a special dividend and membership-fee hike remains on the horizon, representing positive catalysts that would boost the stock. But in the near term, a more measured outlook on COST shares is in order. Consumer behavior Jelinek highlighted a number of stronger areas for Costco, including its Kirkland-branded products across a number of categories. “Kirkland Signature continues to grow market share on everything that we sell. … We put it on everything from alcohol to luggage, and it continues to take market share as we continue to figure out how to lower prices in that brand,” the CEO said. “Our food [and] sundry business, our fresh business, our travel business, continues to be strong,” Jelinek added. This is notable because together food and sundries was Costco’s largest merchandise category by sales in fiscal 2022, accounting for 38.4% of the company’s $222.73 billion in overall revenue. It includes freezer, deli, liquor and dry grocery items. Fresh foods was about 13% of total sales. In electronics, Jelinek said sales of video game consoles like Sony’s PlayStation are “relatively strong” during the holiday season. “Apple is still strong, although there can be some issues getting product at the moment, particularly phones,” Jelinek added, backing up prior reporting on the iPhone maker’s Covid-related supply challenges in China. Apple (AAPL) is also a Club holding. Sales of TVs are actually up on a unit basis, he said, but not in dollar terms, which may lend credence to the view that consumers are being more cautious. “Some of the real higher-end TVs we don’t see selling at this point,” he said. Furniture is another formerly strong area where sales have moderated to be “relatively flat,” Jelinek said. Looking ahead to next year, Jelinek said Costco is taking stock of the economic uncertainty and factoring that into its merchandising plans. “I think we’re being very careful in terms of what we buy in jewelry, televisions and probably furniture — and maybe relatively careful next year on what’s going to happen in apparel.” Inflation Jelinek offered up a detailed look at how price pressures are trending on key items — some easing, some worsening. But overall, “I think you’ll balance it out,” he said. “I see, in my opinion, particularly of just supply and demand, you’re going to start to see prices start to slowly start to come down after the first of the year.” For example, Jelinek said a considerable decline in the cost of shipping containers should provide deflationary pressures for goods made in Asia and exported elsewhere. This includes furniture, he said. On a more granular level, he said egg prices are up due to a bird flu outbreak in the U.S. — and for other reasons, chemicals that go into detergents “seem to be going up a little bit.” He added, “Some of the paper goods are starting to go up because of the cost of paper.” Jelinek mentioned a number of places where inflation is trending downward — lumber, certain products made with resin, and “even meat prices.” Labor costs may remain a bit more sticky, though, he added. (Jim Cramer’s Charitable Trust is long COST, AAPL and TJX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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A shopper wearing a protective mask looks at a television for sale inside a Costco store in San Francisco, California, on Wednesday, March 3, 2021.
David Paul Morris | Bloomberg | Getty Images
Craig Jelinek, chief executive officer of Club holding Costco (COST), said Monday he sees a more-vigilant consumer this holiday shopping season and potentially beyond. However, he also said inflation is generally trending in the right direction, a development that’s good for the U.S. economy over the long term.
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