At first glance, Costco’s latest quarterly earnings look like results that would be the envy of any young, fast-growing company.
The 35-year-old Washington-based retailer grew sales 10.2 percent during its fiscal 2019 first quarter to $35.1 billion and inked a profit of $767 million, or $1.73 per share, up more than 19 percent.
The median estimate of 23 financial analysts following the company was for earnings of $1.63 per share.
Those analysts peppered Costco Chief Financial Officer Richard Galanti with questions during a conference call Thursday about the company’s profit margins as it continues building its online retail business.
Costco shares were down 2.6 percent in after-hours trading Thursday.
Costco’s gross margin in the quarter ended Nov. 25 was 10.75 percent, down from 11.25 percent a year earlier. That was despite comparable sales at stores that have been open a year or more rising 7.5 percent, excluding gas-price changes, the foreign exchange impact and other items.
Galanti said Costco’s management is less worried about small changes in the company’s gross margin and focusing more on investments that drive the business long term and build loyalty.
He said the company has boosted wages and is spending on information technology and its e-commerce capabilities, including fulfillment centers and depots.
Galanti said he expects costs related to those efforts to come down over time. He reminded analysts Costco’s grocery-delivery program with Instacart is barely a year old.
Costco is learning how its e-commerce operation — which saw sales rise 26.2 percent in the quarter — interacts with its main business of selling items from the 768 warehouse stores it operates in 11 countries. It plans 23 new locations in the current fiscal year, including its first in China. For example, the company is putting Amazon-style purchase lockers in 10 stores as an experiment to refine its buy-online, pickup-in-store offering.
Galanti said the company began selling Apple products online and is working on bringing them to stores.
He added that Costco’s e-commerce business is not dramatically more profitable than its business as a whole.
Galanti emphasized that the company’s margins — historically low and driven in large part by membership fees — were affected by many things.
The company’s financial performance in the quarter was clouded by a couple of special items. It recorded a tax benefit of $86 million related to last year’s federal tax cuts and stock-based compensation.
More than 5,000 Costco employees receive annual stock grants in October that amount to as much as 80 percent of their compensation, Galanti said.
It took a $43 million charge against earnings related to a credit-card rewards redemption program.