Costco Finds a Silver Lining in the Covid Pandemic

The warehouse club has managed to serve both members and investors despite covid, inflation, and supply-chain woes.

In many ways, Costco (COST) – Get Costco Wholesale Corporation Report was built for the pandemic. 

The membership-based chain focuses on supplying customers’ basic needs, but it’s not married to particular packaging or brand names.

When you join the warehouse club, you know that what sits on its shelves will change and that you might have to take home 12 rolls of Brawny paper towels instead of the two-pack of Bounty  (PG) – Get Procter & Gamble Company (The) Report you might buy on a normal grocery store trip.

That understanding made it easier for the chain to adapt when covid-related lockdowns started and people could not/did not leave their homes very often.

Members weren’t buying in bulk just because that’s how they got the best deals; they were doing so because buying cereal, toilet paper, and other necessities in large quantities during a pandemic made sense. 

The bad time for the world in many ways created a perfect storm for Costco. Chief Financial Officer Richard Galanti talked about it during the chain’s fourth-quarter-earnings call.

“And in a perverse way, while none of us ever wish covid on anybody, from a bottom-line standpoint, while it impacted some businesses negatively, it’s impacted many more of our businesses positively. And we seem to keep some of that market share,” Galanti said.

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Hard Economic Times Could Be Good for Costco Members

While many Costco items are always in demand, sales for bigger-ticket items vary, and demand patterns were disrupted by the pandemic. 

That led to Costco, along with rivals Walmart (WMT) – Get Walmart Inc. Report and Target (TGT) – Get Target Corporation Report, to end up with too much inventory on certain big-ticket items.

Both Walmart and Target overbought on televisions because demand slipped due to a mix of people being cautious and a lot of Americans having upgraded their TV during the pandemic. Costco is not immune to those problems, which in the past have led to even better deals for customers, but Galanti does not seem too concerned.

I remember the ’08, ’09 one was that at the end of that year, which went from a recession to the Great Recession. It lasted for four or five years. And that — as we entered it — and it was pretty quick when it happened, we saw some, like, a slowdown in seasonal things, which were, like, barbecue grills and patio furniture and things like that. Big ticket, those kind of big-ticket items slowed.

And if I go back to my notes, I’m sure we’ve talked about we had an extra x million dollars of markdowns just to get through that stuff so we didn’t have it lingering after the first of the calendar year.

In a broad sense, however, the CFO sees tough times as being a positive driver for the warehouse club.

“Generally speaking, one of the nice things about our model [is] we’ve done well in good times and bad times. And in good times, of course, people have money to spend. And in bad times, people want to save,” he added.

Costco Builds on Value

The warehouse club saw its membership steadily increase during the pandemic and it managed to hold onto most of those members as conditions improved.

“We felt that we built some additional market share during that. So I think overall, we did find — and I think the good news is, even in bad times, we don’t view ourselves as having to be as conservative as perhaps others might be,” Galanti said.

The CFO says that pricing on any one item isn’t the issue. It’s more about the overall value proposition.

“We’ve driven value at greater value and greater price points. If we want to be a little conservative, fine, but [we’re going to] go forward based on the assumption that we’re providing the best value out there,” he added.

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