Costco (COST) Announces First Quarter Results

Costco Wholesale Corporation (NASDAQ:COST) has announced financial results for its first fiscal quarter, ended November 25th, of the 2013 fiscal year. Net sales increased 10 percent to $23.2 billion and net income (both in total and on a fully diluted per share basis) jumped 30%. Comparable store sales were up 7% overall – 7% in the U.S. and 9% internationally.

Results were somewhat better than expected.

Costco, a “wholesale retailer”, operates membership warehouses in The United States and Puerto Rico, Canada, Mexico, the United Kingdom, Japan, Taiwan, Korea, and Australia.

Discount retailers often report good results when the economy is shaky, as consumers turn to lower-cost options. But Costco is currently out-performing most of its competitors. For example Wal-Mart’s Sam’s Club reported a comp store increase of only 3.8% compared to Costco’s 7%, and Sam’s Club’s segment operating income increased only 12.7% compared to Costco’s operating income increase of 17.8%.

Could something else be at play here? During the time period leading up to and surrounding Black Friday, Wal-Mart’s labor problems brought out the contrasts between Costco’s philosophy on valuing its employees (which it believes produces a competitive advantage) vs. Wal-Mart’s philosophy of aggressively lowering all costs (although its Sam’s Clubs appear to offer better wages and benefits than the typical Wal-Mart).

The differences couldn’t be more stark. In addition to much higher wages, Costco offers more benefits to a much broader range of employees.

According to the company’s website, even part-time hourly employees are eligible for benefits, albeit with fewer choices than full-time employees. Nevertheless, available benefits include medical insurance, dental care, a pharmacy program, a vision program, a 401(k) plan with company matching, dependent care assistance, long and short term disability, life insurance, an employee stock purchase plan, and for employees with 10 or more years of service optional long-term care insurance that can cover “themselves, their spouses, or their parents (in-law) or grandparents (in-law), and their siblings and children over the age of 18.”

In addition there is a separate, free “Care Network” available from the first day of employment, which is designed to help employees resolve other problems. Professional counselors are available to work with employees and/or make referrals to other professionals. The presence of in-house pharmacies and optical centers in most Costco warehouses make related benefits easy to access. Finally, domestic partners can be added to benefits on the same terms as spouses and children.

By all accounts, store-level Costco employees are more experienced and dedicated to their company than those working for Wal-Mart. How much is this difference contributing to Costco’s results?

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