Last year both Walmart (WMT) and Target (TGT) shared that changing consumer demand caused them all sorts of inventory problems. Basically, the covid pandemic made forecasting very difficult because past trends were not indicative of future demand.
In 2021, when American were soft quarantining in their homes, they bought big-ticket items like televisions and video game consoles. Basically, everyone was stuck in the house, so spending centered around making that experience as comfortable as possible.
That trend, however, ended when the world opened back up. This created a very unique situation in the summer of 2022 when Walmart and Target both publicly declared that they had warehouses full of the wrong merchandise for the holiday season.
To fix that, both chains heavily discounted certain items in the late-summer/early-fall period. That wasn't good news for either company's stock as short-term margins took a hit (but it was certainly a good move to build stronger customer relationships).
And while this problem almost certainly hit many major retailers, few, if any, were as public about it as Walmart and Target (likely to protect their stock prices heading into the holiday season). Costco (COST), it turns out, dealt with some of the same problems and took a fairly extreme step to solve them.
Ting Shen/Xinhua via Getty) (Xinhua/ via Getty Images
Costco Quietly Sold Off Big-Ticket Items
Because Costco has a heavy discount model, it's actually hard to know when discounts exceed the norm. CFO Richard Galanti made it clear, however, that the company did discount excess large inventory during the holiday season during his remarks in the warehouse club's first-quarter earnings call.
"If you've been online and saw some things we did during not just the week of Thanksgiving and Cyber Monday but we did some -- anywhere from $100 to $500 off on, I think, a $500 cash card if you bought $3,000 or more of these items," he said.
Galanti explained that this was about getting rid of some inventory for the same reasons Walmart and Target had to sell items off.
"And so, we're getting rid of some of the reason that 26% year-over-year inventory increase went to 10% was we got rid of some of the stuff that we -- some things that we had [in] deep freeze and some things that we had delayed shipping during the supply chain challenge. So, we did take some more markdowns than normal as you would expect, to help get rid of that. And hopefully, that's not a pressure point going forward. Certainly, I don't think it will be as much," he added.
Costco Builds Goodwill With Members
Galanti made it clear that Costco was not surprised by the weaker demand for big-ticket items.
"And we certainly understand that big-ticket discretionary things have shown a little weakness, in part, because of our strength from a year ago, and in part, it's got to be part of the economy," he said.
Selling off some of those items at a discount makes sense for a chain built around delivering value for members. He also noted that when one area weakens, Costco has other strengths that make up for it.
"And the good news is we have big chunks of our business that are fresh foods, food, and sundries, health and beauty aids, gas, all those types of things. And even other things like that are small, but travel has come back really strong from a really weak place a couple of years ago," he added.
