People join Costco (COST) to save money.
Sure, it's fun to walk through the store eating samples, and seeing what's new, but at the end of the day you pay your membership fee for access to low prices. The chain has been very aware of that and its leadership has kept its buyers focused on keeping prices low. And, in situations where increases are unavoidable, the chain's purchasing department has been very aggressive about understanding why prices have gone up.
CFO Richard Galanti explained how the chain has handled prices going both up and down from its vendors during his remarks in the company's fourth-quarter earnings call.
We're reminded by Craig and Ron, the buyers reminded at the budget meeting when prices were going up, make sure you understand why they're going up. What piece of it is raw material costs? What piece of it is freight costs? And when these things come down, you better be on the phone with them calling them saying, when are we going to get a reduction? And so I think in part because of our limited selection -- our limited number of SKUs and a huge volume, I think our buyers know pretty darn well a lot of the cost components of these things. And that, I think, bodes well for us.
When things go well for Costco, they go well for the chain's members. Galanti made it clear that he's optimistic about pricing and where the chain sees the economy going.
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Costco Sees 'Light at the End of the Tunnel'
Costco has not been immune from inflation or supply chain problems. Galanti has seen some signs, however, that those issues are getting better.
"But again, at the end of the day, we are seeing -- I think it is a little light at the end of the tunnel. Certainly, container rates have come down. Container shortages have improved. The port delays have improved, all the things go into it," he said.
The warehouse club also sees some positive financial news from the dollar being strong.
"And as raw material prices come down -- and FX generally helps you and hurt you. When we report a foreign company's earnings in U.S. dollars, and the currency has gone down 10%, it's 10% less earnings that we report. But at the same token, since we're using U.S. dollars in a lot of things, not just in the U.S. to buy different supplies and raw materials from other places, that helps you a little bit," he said. "And again, I think it's -- could something happen tomorrow to change this? Sure. But at least we're seeing the things going -- starting to go in the right direction."
Costco Has Good News for Members
Last year, due to uncertain inventories and shortages in key areas, Costco (and other retailers) had to curtail promotional activities. You can't really offer discounts when you're not sure when new inventory will arrive.
Galanti said he's seeing some changes this year. "
"There's more promotions. I remember last year or the last couple of years, again, given shortages in electronics, we saw -- we and the industry saw a lot less promotional activity being afforded retailers from the manufacturers on TVs. There was no need to do that. And we're starting to see some of those promotional activities come back," he said.
The CFO also explained how that has impacted the warehouse club.
"One of the things that we like is our multi-vendor mailer, both the existing one, as well as other promotional things, we do like that online and direct. And those had to be changed in some ways because of shortages or allocations of inventory. A lot of times in those types of MVMs, you've got a lot of high items like promotional things like TVs, as well as huge high sales volume items like paper goods and things like that. And you're looking at the paper goods as well," he added.
