Costco CFO Cites Less Holiday TV Discounting Because Vendors 'Haven't Had to'

Higher gross margin in Costco’s fiscal Q1, ended Nov. 22, was attributable partly to demand for consumer products, which have encountered less promotional discount activity in the pandemic than is normal for a holiday selling season, said Chief Financial Officer Richard Galanti on a Thursday earnings call.

Spotlighting TVs, Galanti said “prices have come down across the board just because they always do over time,” and while they keep getting “better, bigger and less expensive, there's not the kind of promotional money being thrown at it by the manufacturers because they haven't had to.” Demand for TVs, Apple AirPods, laptops “and everything else in between” is “enormous,” he said. On supply shortages, he said, “even if capacity has gone up, it could go up a lot more.”

Costco's Q1 revenue grew 17% to $42.4 billion, as U.S. same-store sales rose 14.6% from the year-ago quarter. Membership fee income grew 7% to $861 million, Galanti said. E-commerce generated 7% of total revenue, with an 86.4% comp increase, he said. E-commerce percentages “jumped dramatically” with COVID-19, he said. He declined to say how much of online revenue comes from Costco members.

E-commerce is “a little less profitable” than brick-and-mortar sales because online categories don’t include some of the highest gross margin categories, such as fresh food and apparel, said Galanti. Electronics, a “lower-than-average” margin business, are a “much bigger percentage of penetration online." E-commerce profitability has been propped up by comp sales increases. The company is “continually adding locations” for shipping e-commerce purchases to get closer to the consumer, he said.

Responding to a question on Costco’s plans for contactless curbside pickup, which has seen a big uptick among other large retailers during the pandemic, Galanti said, “We continue to look at it and scratch our heads a little bit.” The retailer has no current plans to offer the option. One challenge for Costco is that prices are the same online and in store, but offering a buy online, pick up in store option adds cost. “So somebody is paying for the picking it up and storing it and waiting for you to pick it up,” he said: “Somebody has to pay for it, either the company or the customer.” Costco added eight net stores during the quarter and plans 20-22 for the fiscal year, weighted to the latter half, with none slated to open in the current quarter. It operates 803 warehouses, including 558 in the U.S. and Puerto Rico.