A 'Window' Into the K-Shaped Economy: Consumer Concerns COST Earnings Show

SPEAKER_1 (0:00)

So let's dive in to some of these moves and the reaction we're getting to Costco with our panel today. Joining us now, Mel Casey, Senior Portfolio Manager, FBB Capital Partners, and Jharonne Martis, Director of Consumer Research at LSEG. Great to have you both on. Mel, let's start with you. I mean, they beat on the top and the bottom lines, even excluding the tariff refund, there was still a beat. Well, what is this quarter telling us about the underlying strength of the business?

Mel Casey (0:25)

Thank you for having me on. First of all, yeah, it's a good reaction today. It's outperforming the market. Recall, it's still underperforming significantly here today at the broader market. The earnings were good. You're right. If you exclude the one-off tariff stuff, still a good report, but I just think the expectations here for a stock or the current valuation, that investors probably need to see a little bit more for it to really catch up to the rest of the market. So there's continues to be a good traction with the existing, the renewals, the pricing power with existing members, but that membership growth number does matter to analysts. If you're really going to justify the valuation as it is, that's a number that people need to focus on.

SPEAKER_1 (1:10)

I know, Sharon, same-store sales were higher, I mean up 8.8 percent in June, 8.9 in July, 8.4 in August. I was just talking to one of my guests earlier in the show about how sentiment and spending are not really matching up right now.

What do those numbers tell you about the health of the consumer right now, particularly given the broader concerns about spending and how sustainable this disconnect between low sentiment and continued spend can go on for?

Jharonne Martis (1:40)

Well, today's number gave us a fascinating window into consumer's behavior. It was very evident from the results that the consumer is very much, they're very much focused on value and convenience. Digital comps grew 20 percent, and this is in line with what we've seen throughout this earning season. The theme being that consumers are gravitating more towards the omni-channel experience. We saw that not only did consumers gravitate towards non-food comps, they also gravitated towards pharmacy, digital telling us that they are taking advantage of the full omni-channel experience at Costco, and the value proposition is key. Not only are the lower gas prices making the membership proposition more attractive, but it's also allowing the shoppers to fill up their tanks, park their cars, and they're going in by more than everyday essentials. They're going in and actually spending money on jewelry, home furniture, and even electronics, which those discretionary items have been very weak in demand at other retailers. All in all, we're seeing that all cohorts of consumer income, they all want the value proposition, and they want the convenience of digital e-commerce shopping.

SPEAKER_1 (2:59)

Mel, that slower new membership growth number was the one thing that kept popping up when we initially saw the move to the downside. You say it's just a potential indication of the K-shaped economy that we have. Does it give you any concern that we saw that slight slowdown and that slight miss on that metric when we do continue to see existing members spending at very strong levels?

Mel Casey (3:21)

Yeah, the K-shaped theory is important to look at here because when you think about Costco, sometimes it looks like more of a movement than a business, and the loyalty, it's almost unique in retail.

But there's still an economic sensitivity component to this. So where does that incremental customer come from? And so if they're struggling to meet expectations in terms of new subscribers, that could be an indication that the economy is making that kind of K-shape.

SPEAKER_1 (3:54)

And Jharonne, you highlighted the food. Everybody loves the Costco hot dog, of course, the hot dog and soda combo.

They've been cutting prices as well on some of those Kirkland products to maintain that value. And a guest I had on earlier said value, value, value. That's what matters right now. We weren't talking about Costco, but how important is that value strategy in maintaining traffic and loyalty in this environment, that $1.50 hot dog and soda and these lower price Kirkland options?

Jharonne Martis (4:26)

Oh, it's become key.

The value proposition is no longer a promotional tool. It's actually become a competitive advantage. In fact, in a collaboration with Centric Market Intelligence, LSAC discovered that the amount of merchandise on sale, which is called the discount penetration, actually rose to higher levels compared to pre-COVID levels. And this is telling us that retailers are increasingly, this year, showing up more and more, having more merchandise on sale, but the actual average discount on these products hasn't actually changed. So it's given the consumer the illusion that because more merchandise is on sale, they're actually getting a bigger value while the retailer is able to be more strategic and maintain those margins.