Costco Has 7 Ocean Charters for Next 3 Years

Date: Monday, March 7, 2022
Source: Sourcing Journal

Costco retained more than half a dozen ships to manage a significant chunk of its global shipping load as it looks to better handle escalating supply chain costs.

In a Nutshell: Chief financial officer Richard Galanti told Wall Street analysts in a conference call that the warehouse membership club started by chartering three small container vessels last year to get a grip on freight cost, following in the footsteps of retail giants Walmart, Target, Ikea and The Home Depot.

“We have now [chartered] a total of seven ocean vessels, up from those three, for the next three years,” Galanti said of the ships handling 800 to 1,000 containers at a time. “And these would transport containers between Asia and the U.S. and Canada. We’ve also leased containers for use in these ships. With these additions, about a quarter of our annual transpacific containers and shipment needs are being accommodated this way, which gives us additional supply chain flexibility.”

Galanti said inflation, port delays, container shortages, supplies outages for various components, raw materials and ingredients, labor cost pressures, and truck and driver staffing matters as just some of the challenges Coscto faced in the quarter.

“Overall, we’ve done a pretty good job … given these supply chain challenges. I think that’s evidenced in our sales strength,” he said.

Despite the uphill battle, “[W]e’re staying in stock and continue to work to mitigate cost and price increases as best we can,” Galanti said, estimating 6 percent inflation for the quarter.

Costco has had to raise some prices but worked with suppliers to equally absorb the increases.

In 2020, Costco acquired Innovel Solutions, now rebranded Costco Logistics, to improve delivery times on many items from two weeks to less than seven days.

Second quarter comp sales increased 9.3 percent worldwide and 8.3 percent in the U.S., with the average transaction rising 4.6 percent worldwide and 6.9 percent in the U.S., Galanti said.

The 14.4 percent comparable sales increase for the quarter reflected slight slippage from the fiscal year’s first quarter gain of 14.9 percent. Costco shares closed down 1.42 percent at $525.50 on Friday.

Galanti said the company plans to open a net total of 28 new stores for the year.

Net Sales: Total revenue for the three months ended Feb. 13 rose 16 percent to $51.9 million from $44.8 million, which included net sales that also were up 16 percent to $50.9 million from $43.9 million. The balance of revenue was from second-quarter membership fees.

E-commerce sales rose 12.5 percent on top of a 75 percent increase in the year-ago quarter during the Covid pandemic. The CFO said home furnishings was among the stronger e-commerce departments that saw year-over-year increases during the quarter.

The four-week reporting month ended Feb. 27 saw a 15.9 percent net sales increase to $16.29 billion. The earlier start of the Lunar New Year, on Feb. 1, negatively impacted the month’s sales.

For the six months, total revenue rose 16 percent to $102.3 million from $88 million, including a 16 percent gain in net sales to $100.4 million from $86.2 million with the balance from membership fees.

Earnings: Net income in the quarter rose 37 percent to $1.30 billion, or $2.92 a diluted share, from $951 million, or $2.14 in the year-ago period.

Wall Street expected adjusted diluted EPS of $2.74 on revenue of $51.47 billion.

For the six months, net income rose 24 percent to $2.62 billion, or $5.90 a diluted share, from $2.12 billion, or $4.76, a year ago.

CFO’s Take: “So one of the good things that we’ve been blessed with is that we are the extreme value proposition, and it generally bodes well for us in good and bad economic times,” Galanti said.


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