Yahoo Finance’s Brad Smith and Seana Smith recap the top takeaways from Costco’s earnings, how Wall Street is reacting to the wholesaler’s fiscal second quarter, the vibe of the earnings call, and what execs had to say about $4.99 rotisserie chickens and membership fees.

Video Transcript

[MUSIC PLAYING]

BRAD SMITH: "After The Call" on Yahoo Finance starts right now. Brad Smith here with the birthday girl, Seana Smith, hanging around with us, listening in to Costco's earnings call. Seana, we just got off this Costco earnings call. And the stock has come through dipping. Yeah, it came through dipping, dip, dip, to paraphrase Cardi B there. I'll pull up the After Hours chart here for our viewers.

I've actually got a heatmap of our retail-- retail sector on the Wi-Fi interactive here. And you're taking a look at it there on your screen, as well. Actually, you've got the major averages there on your screen. But I'm taking a look at the heat map here on the New York Touch One, and Costco, as of right now, we're taking a look at Costco down on my screen. And we're going to get that situated for you folks who are viewing as well, down by 3% here in extended hours.

And particularly one thing that we are going to continue to watch here going forward is the fact that this reaction is not totally off of what was talked about on the call. It was more so on what was actually announced in the second quarter results. I mean EPS, that beat. However it's the sales that actually missed here, Seana.

SEANA SMITH: Yeah, certainly. It was a-- a disappointing report I think you can say, at least that's how the Street is-- is interpreting it. Some of my key takeaways though, from this call things that we wanted to hear was in terms of improvement on inflation. There were signs of inflation slowing here. That inflation word was mentioned more than 30 times on this call. Really pointing to the fact that so many people were really focused on the pricing, and what we're seeing there.

Also, more people are buying Kirkland, because of those higher prices. Now Kirkland, if you don't know, it's their in-house brand. It's very, very popular. But they were saying that they saw a little bit over 1 and 1/2% increase in sales penetration on the food side of Kirkland, asking whether or not that's a trade down. They were saying, the executives there, Richard Galanti, saying that he actually views it as a trade up here. But more-- more people certainly favoring that in-house brand, and also just the higher penetration on executive memberships.

And we'll talk about membership, and fees, and everything like that in just a couple of minutes here. But the higher penetration on executive memberships they were saying that is only good stuff here. Because that group, they're more loyal. They spend more. They come more frequently. And that's exactly what Costco wants to see, especially at a time like this, when there is so much uncertainty, and some consumers are pulling back on spending because of those higher prices.

BRAD SMITH: Yeah, that's spot on. And I'm glad you brought up Kirkland, because I had talked about this even as we were teasing this week's "After The Call" show and that strength of the Kirkland brand. And here's how they position Kirkland. They talk about it not as a trade down, but instead is a trade up or a trade equal, among their consumers there. So they're seeing more trade into Kirkland than usual.

They did note that on the call. It gives us a little bit of the sense and what they're seeing in their members and their consumers right now. And it kind of mirrored the tenor that we heard from a company, in Walmart, a competitor on the Sam's Club front, or the buying in bulk front. Walmart said on their earnings call, look, if the economy is strong, our customers have more money. That's great. If things are tougher, they come to us for value. Today's inflation, they're continuing to see that to happen. I imagine similarly at Costco, given what we had heard on the call, thinking about some of the takeaways that I took out of this.

Number one, with what we just heard from both of those companies and how they're describing the consumer environment right now, Richard, the CFO, my goodness, this guy is unfazed, ladies and gentlemen. Richard Galanti, he's been with the company since 1984. Where were you when? I was nowhere. So at the end of the day, Richard, unfazed, I think that's a good steady hand that we're continuing to hear.

And even as they're thinking through what an economic downturn might look like, ensuring the investor community, ensuring customers that what they're going to continue to do is improve the value by lowering the price, and that that's going to drive more sales. So we heard Richard talk about that. We also heard analysts ask about the margin stability. And they kind of appreciated. They gave a nod to that. And so that was a positive checkmark as well.

And then the management of inventory here, key, and I wrote down one note. The inventory reduction year over year was a byproduct of the flow being better there. Richard also saying that we feel good about the inventory levels by category. I will give them one knock on the digital strategy front. I think we still need to hear more from them on that. However, they do have a new Head of Digital that they discussed on the call. We'll see what more comes over the next few months as that strategy continues to really come to fruition here.

But they can't drag their feet too much on that front as well, we do know. Because some of their competitors in this buying in bulk or wholesale category, my goodness, they are absolutely crushing it with that digital disruption and digital conversion, I say, or transformation. That's-- that's the buzzy marketing term out there, the digital transformation that everybody's been talking about for years.

So those are some of the key takeaways from this call. But we got to play a clip from this call too, Seana, because they started to talk about pricing. And as we were talking about even value, value by lowering the price going to drive more sales, it's been viral before how much they've talked about competing on the chicken price. Listen to this from the call.

RICHARD GALANTI: If you go do a little homework on what the cost of-- of-- processing and selling a rotisserie chicken, are $4.99 price is, well which we maintain, is an investment in low prices to drive membership, to drive the sales, in a big way. So there are some things that we do, notwithstanding huge inflation.

BRAD SMITH: Now I don't know if you remember those viral TikTok videos from a couple of years ago, when everybody was just talking about you know why Costco keeps the prices on the chicken low, it's to get you in the store for the chicken. And make you walk by all the jeans, make you walk by all of these other discretionary purchases, and parts of the store just to get you to the low-priced chicken. Knowing they'll take the hit on the chicken. They just want to make sure that you get a bunch of other things on the way, and load up the cart, Seana.

SEANA SMITH: Yeah, well it certainly seems to be working. I mean, that is a price point that you obviously cannot beat, $4.99 for a rotisserie chicken. That is enough to get me through the doors, and I think a lot of people into that store. When you talk-- you take a look at the total revenue for Costco, clearly initiatives, that type of strategy is working, because yes, that growth is slowing. But they are still seeing growth. The sales growth for the most recent quarter up 6 and 1/2%, just above $55 billion.

So certainly, some of their strategies here are proving to work, and even in this environment. I want to go back to one thing that I mentioned earlier, and that's inflation. Demand certainly has been weakening. We have seen it from a number of their competitors in terms of what people are buying. And more specifically, what they're not buying. They're passing on some of those big-ticket items, like electronics, like jewelry. Some of the clothing-- clothing options just in a few, we heard that on the earnings call with Costco. And we also heard it from a number of other larger retailers over the last couple of weeks when it comes to Target, when it comes to Walmart just to name a few there.

But there was some good news though, in terms of the fact that inflation may be easing on some products there. Because they are starting to maybe pass that along to the consumer. And one analyst did ask Richard about that, because the fact that they did cite some of those lower inflation numbers than what some of their competitors 0 experiencing.

So those price gaps are starting to widen. And in response to that, Costco CFO, Richard Galanti said that it's an art, not a science, when you're trying to figure out what exactly to mark down. And they're looking at items where they can make a big difference fast, those high velocity items. And I think that makes all the difference in the world, especially when you're talking about selling certainly necessities, but also trying to sell as many discretionary items as you can in this very, very tough environment.

So I think a lot of the key points when it comes to this call is it wasn't a great call, but it wasn't necessarily as bad as I think many on the Street maybe had been fearing at some points.

BRAD SMITH: OK, all right. So that gives me a little bit of insight into what your vibe check might be, Seana.

SEANA SMITH: Oh, I gave it away a little bit.

BRAD SMITH: Yeah. Yeah lay it on me. What do you got?

SEANA SMITH: You know, it-- it was tough. I have a little issue. I think we need a little bit more just in terms of our-- we're able to choose from. But I went with bad, because I didn't think it was solid enough to go with good. I was-- I was trying to negotiate for somewhere in between, an OK, a fair type of rating. But I went with bad, because I think there's a lot of areas that were on this call that Costco clearly needs to improve in terms of some of their growth numbers.

The drop that we certainly saw in e-commerce a little bit worrisome as we look ahead to the future, and what that might mean in terms of losing some of that market share to the competitors that are able to post stronger gains in terms of their digital business. But like you said before, there's a new person there, a new executive that's leading that division, the digital division. To me, that's somewhere that we could expect to see some growth in a couple of months, because he's only been there what? Less than six months at this point.

BRAD SMITH: Yeah. So I was similar in where I wanted to place my vibe check. But I guess I leaned to the opposite end because I did give them a little bit more credit on some of the initiatives that they're trying to move forward with. And yeah, OK. I put them in the good category. This is, for our viewers, this is not a Yahoo Finance 2022 Company of the Year bias. This is not a me being a fan of the free samples bias at all for Costco. This is not even me being a fan of the Kirkland golf balls type of bias out there.

This is purely about what that expansion may look like, and how that can contribute to them being profitable. You think about the storefront footage or the footprint rather, that they operate right now, 848 warehouses. They're expanding more internationally. And here's what's key about that. International as a percent of sales is more profitable for this business.

And so as they continue to move into more territories, especially in the Eastern hemisphere, that's where we could see even more of a propensity from some of those shoppers, and the profitability on that shopping experience really be a boon to not just the growth strategy financially, but also as a brand equity and broader type of expansion mechanism for Costco here. So that was one thing that I kind of really keyed into in addition to some of the key takeaways that we had already discussed.

And we talked about apparel. I mean, I'm standing in the apparel aisle here at Costco--

SEANA SMITH: I love the background.

BRAD SMITH: --as you can see.

SEANA SMITH: I was going to say, you're really showing me up here with that.

BRAD SMITH: You know, they've got the jeans. They're bidding more into the jeans here. They've got apparel strength. And getting more of those well-known inventories out there, that's what they said is also key to doing better in that particular category as well, Seana.

SEANA SMITH: It certainly will be. And an area of the business that we need to focus on here going forward, let's talk a little bit more about membership fees. We know that is something that many people were waiting for, were listening for in this earnings call. Ali Canal closely watching that. And Ali, it's been what? Just over five years since the last hike in fees. What have we learned?

ALEXANDRA CANAL: Yes. Yes, so basically we know that membership growth at Costco, it remains strong. Membership fees brought in $1.03 billion in the quarter. That's up 6.2% from the year ago period. But the big question on analysts' and investors' minds is, will they hike up those fees? And Costco basically is saying, yes, but not yet. Executives on the call said it's a question of when, not if, but that Costco, no matter what happens, will continue to remain incredibly competitive.

Now, you said that Costco hasn't raised fees in about almost six years now. And they tend to increase their fees every 5 and 1/2 years, which means we are really due for one at this moment. The last price hike happened in June of 2017. But analysts have said that due to the weak macro environment, coupled with those strong same store sales renewal rates, that the delay in those fee hikes, that's not really that surprising.

And if we compare the current Costco membership to other wholesale retailers, you have the Costco gold star membership, which costs $60 per year, and an executive membership goes for 120 bucks per year. And that's significantly higher from competitors like Sam's Club that's owned by Walmart. They raised prices in August for the first time since 1999, increasing its annual fees to 50 bucks from 45 for club members, and to 110 bucks from 100 for plus members. And then BJ's, those basic membership fees cost $55 per year, with its perk rewards membership at $110.

So Costco significantly more, but again, the retail giant really emphasizing the fact that they have the best value, and they are the most competitive.