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News

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Costco shares slide despite earnings beat

 

Wednesday, September 27, 2023

Today’s headlines

What’s happening: Shares of Costco Wholesale Corporation fell in after-hours trading on Tuesday, following the release of the company’s fourth-quarter results.

What happened: The membership-based retailer posted over 9% growth in sales, which ended a streak of decelerating sales growth in the prior four quarters.

However, Costco Wholesale reported a decline in one of its major sales metrics for the latest quarter.

How were the results: The Issaquah, Washington-based company reported high single-digit growth in sales for the quarter ended September 3.

  • Total revenues climbed 9.5% to $78.939 billion, topping the consensus estimates of $77.9 billion.
  • Adjusted earnings rose 16% to $4.86 per share, versus 18% growth in the previous quarter, and exceeding Wall Street expectations of $4.79 per share.

Why it matters: Costco had benefitted from more people starting to cook at home during the pandemic. Higher inflation also resulted in customers signing up and renewing their memberships for warehouse clubs.

These trends continued during the latest quarter, resulting in Costco closing the period with 71 million paid household members, representing around 8% growth from the year-ago period.

Costco had 32.3 million paid executive memberships at the end of quarter, up 981,000 since the close of the previous quarter. Membership fees grew to $1.509 billion, from $1.327 billion in the year-ago quarter.

However, shoppers pulled back on discretionary and big-ticket products amid soaring inflation and higher borrowing and mortgage costs due to interest rate hikes. The retailer’s total comparable sales rose 1.1% year-over-year, with total ecommerce sales contracting 0.8%.

Its comparable sales in the fourth quarter rose 0.2% in the US, up 1.8% in Canada and 5.5% in the Other International segment. Traffic increased 5.2% year-over-year globally, while rising 5% in the US. Its average transaction amount fell around 4% worldwide and 4.5% in the US during the quarter.

The company’s gross margins expanded by 42 basis points to 10.6%, driven by better product sourcing and tighter inventory control.

How shares responded: Costco’s shares fell 2.5% to $539.18 in the extended trading session, after the company released quarterly results. The stock has added 22% year-to-date.

What to watch: Traders will watch the overall economic environment, while focusing on the inflation rate, interest rate hikes by central banks, and global economic growth.

The markets today

The euro will be in focus today ahead of a basket of economic reports

Context: The EUR/USD forex pair fell on Tuesday, recording losses for the sixth straight session.

Details: The European common currency remained under pressure on Tuesday, falling to a six-month low amid concerns of a widening rate gap between the US and Eurozone.

The ECB (European Central Bank) raised its key interest rate to a record 4% at its meeting earlier this month. However, policymakers signalled that the latest hike was likely to be the last. The ECB also increased its inflation projections for the bloc.

ECB President Christine Lagarde had said during an earlier speech that the latest economic indicators signalled weakness in the region’s economy in the third quarter. She added that inflation is likely to ease further but could remain higher for longer.

The US Federal Reserve also kept its interest rate unchanged at its meeting last month. However, policymakers adopted a hawkish tone, signalling another rate increase before yearend.

The interest gap between the US and Europe currently stands at 100 basis points, which could increase as the Fed is open to raising its benchmark rates by another 25 basis points during its November or December meeting.

Strength in the US dollar also exerted pressure on the EUR/USD forex pair on Tuesday. The US dollar index, which measured the greenback’s performance versus a basket of major peers, added over 0.2% to reach 106.23.

The EUR/USD forex pair fell around 0.2% to 1.0573 on Tuesday. The STOXX Europe 600 Index also declined by 0.61% to settle at 447.70, with Germany’s DAX recording the weakest close in six months.

What to watch: Investors await the release of economic reports on money supply M3, bank lending to households, bank lending to companies from the eurozone today. M3 money supply in the Eurozone had contracted by 0.4% year-over-year to €15.6 trillion in July and is expected to fall another 1.1% in August.

Analysts expect bank lending to households in the Eurozone to rise by 1% year-over-year in August, following July’s 1.3% growth. Bank lending to companies, which grew 2.2% year-over-year to €5.15 trillion in July, is projected to rise by 1.8% in August.

Other Markets: US trading indices closed lower on Tuesday, with the Dow Jones index, S&P 500 and Nasdaq 100 down by 1.14%, 1.47% and 1.51%, respectively.

The news shaping the markets

Ukrainian President Volodymyr Zelenskyy said sanctions imposed on Russia were not enough to halt its “aggression.” The news sent the safe-haven US dollar index slightly higher this morning.


Australia’s monthly consumer price index accelerated to 5.2% to August, from 4.9% growth in July, exerting pressure on the AUD/USD forex pair.


South Korea’s Business Survey Index for the manufacturing sector rose to 68 in August, from 67 in the prior month, which sent the KRW/USD pair higher in forex trading this morning.


Argentina’s economic activity estimator fell 1.3% year-over-year in June, versus a 4.4% contraction in the prior month. The figure was also better than market expectations of a 3.7% decline and lent support to the ARS/USD forex pair.


Colombia’s industrial confidence indicator rose to 3.7 in July, from -0.2 in the previous month. This being the highest level since September 2022 sent the COP/USD pair higher in forex trading this morning.

What else to watch today

Germany’s GfK consumer climate indicator, France’s consumer confidence indicator, unemployed persons and initial jobless claims, US MBA mortgage applications, durable goods orders, crude oil inventories, distillate stockpiles and gasoline stocks change, Brazil’s loan growth, Mexico’s balance of trade, as well as Russia’s unemployment rate, real wage growth, industrial production, corporate profits, business confidence, retail sales and GDP growth rate.


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