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Costco boosts inflation estimate for 3rd-straight quarter, says some inventory ‘won’t make it before Christmas’

Shares of Costco Wholesale Corp. charged to a record high Friday, after the membership-based warehouse retail giant reported better-than-expected earnings, even as inflation and supply chain issues continued to take a bigger bite out of its results.

The stock COST, +6.58% rose 6.6% to $558.82, easily clearing the previous record close of $554.88 on Nov. 29. The stock is also recorded the biggest one-day percentage gain since it shot up 8.4% on March 17, 2020.

Costco reported late Thursday fiscal first-quarter profit, revenue and same-store sales that all rose above consensus analyst forecasts, as compiled by FactSet, despite continued supply chain disruptions and increasing inflation pressures.

“Some inventory, in fact, won’t make it before Christmas, but we’ve mitigated that as best as possible and feel pretty good about it.”

— Costco Chief Financial Officer Richard Galanti

Meanwhile, merchandise cost growth of 17.3% outpaced revenue growth of 16.6%, and gross margin fell by 49 basis points (0.49 percentage points), resulting from efforts to mitigate price increases to customers. That compares with a gross margin decline of 32 basis points in the sequential fourth quarter and a 35-basis-point drop in the third quarter.

The stock’s one-day, post-earnings gain would be the biggest in at least nine years, according to available data on earnings releases provided the Securities and Exchange Commission.

On the post-earnings conference call with analysts, Chief Financial Officer Richard Galanti listed a lot of factors pressuring the supply chain and inflation, including port delays, container challenges, COVID disruptions, shortages of various components, raw materials, ingredients, packaging supplies, labor cost pressures and truck and driver challenges.

That led Galanti to estimate year-over-year price inflation for the first quarter of 2022 to be 4.5% to 5.0%. That’s up from his price-inflation estimate of 3.5% to 4.5% provided in the fourth-quarter call in September, which was up from an estimate of 2.5% to 3.5% provided in the third-quarter call in May, and compared with his estimate of “probably flat to up 1%, 1.5%,” in the second-quarter call in March.

That’s actually not so bad, considering the latest government data out Friday showed that U.S. consumer prices rose at a 6.8% yearly rate in November, the highest rate seen in 39 years.

Also read: Americans pay the price for high inflation each time they go to the grocery store.

“Hopefully, we’re getting towards the top and it’ll start flattening out and subsiding, but we’ll see,” Galanti said, according to a FactSet transcript.

FactSet, MarketWatch

Regarding supply chain issues, Galanti said about 79% of import containers arriving on the Pacific Coast are late by an average of 51 days; a few percentage of those are actually a few days early, but many of them are a few days more than 51 days late.

He believes “we’ve dealt pretty well” with the challenges, as “we’ve ordered early in many cases,” and have some “extra billion dollars” invested in inventory “even if it hangs around for a little bit.” But he expects the issues to continue to ebb and flow, making it hard to pin down. As a result:

“Some inventory, in fact, won’t make it before Christmas, but we’ve mitigated that as best as possible and feel pretty good about it,” Galanti said.

Costco’s stock has soared 48.3% year to date, while the SPDR Consumer Staples Select Sector exchange-traded fund XLP, +1.69% has gained 10.0% and the S&P 500 index SPX, +0.95% has advanced 25.5%.

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