Costco's quarterly earnings conference call was mostly overlooked last week as it reviewed a period when coronavirus disease 2019 (COVID-19) was not in the collective American psyche. But comments on the March 5 call suggest that the country's largest unbranded gas retailer has seen brisk growth in fuel volumes, particularly since Feb. 16, when its fiscal second quarter ended.
As always, Costco Chief Financial Officer Richard Galanti parsed the impact of "gasoline inflation" on top-line growth, noting that U.S. warehouses in the 12 weeks ending Feb. 16 saw sales increase 9.1%, with the fuel inflation accounting for 1% of that number. But the magical allure of gasoline has always been a secret to increasing patron frequency, and visits to the warehouses were up 6.1% during the period.
The company never reveals the details of gasoline margins, but did say that overall gross margins for all items were 10.98%, down 31 basis points with fuel accounting for 22 points of that decline.
Nationwide, gas prices have declined by less than 10cts gal since Feb. 16, but wholesale costs have plunged 35-55cts/gal. Costco has cut gasoline prices far more aggressively than other retailers, but the company has no doubt captured extra margin as well as additional market share.
March 2019 saw an average gas price of $2.545/gal, and this month is shaping up to see a likely average pump price of $2.25/gal or even less. It would surprise no one in the fuel supply chain if Costco execs talk about gasoline price deflation for the rest of 2020.
For comparison, the average price of gasoline in the completed Feb. 16 quarter was 20cts/gal higher than the year-ago period.
Galanti did single out "higher sales penetration" for gasoline as well as e-commerce in the conference call.
The chain did not open any new warehouses in the quarter, and new openings are on a slow pace for the next two calendar quarters. However, the company will move into its 41st state in coming months with a club in Ridgeland, Miss., and its international expansion will see a warehouse opening in Perth, Australia.
Later this year, in the fiscal fourth quarter that follows the summer, a much more ambitious 11-13 new warehouse openings are planned.
Since the second quarter ended, fuel sales were helped by "off-the-charts" traffic at stores where consumers stocked up on staples as news of the coronavirus spread. Week four of February commenced the craziness, and the uptick in visits has continued through mid-March. In addition to disinfectant, toilet paper and pharmacy items, the conference call cited gasoline sales on the rise.
Galanti minimized gasoline's contribution to the bottom line in the 12 weeks ending Feb. 16, noting that the trend "wasn't worth talking about" with a minimal "plus or minus this year versus last." But he added that fresh food, gas and executive memberships are "the things that drive our business." Costco wants to be aggressive in pricing when sales are bad and when sales are good, he added.
OPIS MarginPro data shows that Costco typically priced regular gasoline some 26.4cts/gal under that of the competition during the 12 weeks ending Feb. 16.
The company has maintained an aggressive stance since that point, retailing gasoline some 24.3cts/gal below that of competitors. But that period has seen U.S. fuel margins for "other retailers" occasionally flirt with 50cts/gal or more. Hence, the company has probably seen a surge in both volumes and fuel's bottom line.
Comparing Costco retail prices to the average unbranded rack yields a margin of 9.7cts/gal for the second quarter, but that has risen to 12.7cts/gal since Feb. 16. Costco is widely believed to be among the two or three sharpest buyers of wholesale fuel, with deals often negotiated below OPIS Low Rack so fuel may indeed be the star performer as spring approaches.
Postscript: The chain boasts 55.3 million households with just under 101 million total cardholders. Renewal rates have been steady at 90.9% in the U.S. and Canada.
--Reporting by Tom Kloza, tkloza@opisnet.com;
--Editing by Barbara Chuck, bchuck@opisnet.com
Copyright, Oil Price Information Service
