What Costco's earnings are saying about the retail sector

Costco (COST) topped earnings and revenue estimates as other retailers are reporting weakness across the sector. Forrester Research Retail Analyst Sucharita Kodali joins Yahoo Finance Live to react to Costco's fourth-quarter earnings report and how it compares to the consumer narratives playing out in the larger retail space.

"Costco's business does tend to be fairly recession-proof, similar to other mass merchants like Walmart, in large part because when a consumer may have lower expectations for the future, they're going to fly to value," Kodali says. "Costco absolutely offers that."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video transcript

- Let's start with Costco results because they had strong grocery sales but weaker trends in some of those discretionary items. What does this tell us just about the state of the consumer at this point heading into that very important holiday season?

SUCHARITA KODALI: Yeah, well, I mean, it's a pretty consistent story through all of retail. You have the groceries doing particularly well, in large part because these are the items that-- Food, in general, food, both at home and away from home, has done incredibly well in the last couple of years. It's been one of the beneficiaries in spite of waning consumer confidence and inflation numbers, so that's not surprising.

The discretionary piece is also not surprising. It's the same story that we heard with Target. Walmart said the same thing in its last earnings call. And you see it in the overall consumer spend numbers that the census releases on a monthly basis, which is categories ranging from apparel to electronics, which are absolutely categories that Costco carries which just haven't done as well.

Home, as well, is one that's particularly soft in the last year and-- and Costco, as far as discretionary is concerned, has historically sold a lot of things like firepits and patio furniture. So there's no doubt that those are categories that are challenged, and you're not seeing the strength, even at Costco, in those sectors.

- The expectations index, as we kind of look at some of the Conference Board data that had come out, showed that consumer short-term outlook for income, business, labor markets, it declined, and expectations falling below 80, a level that historically signals a recession in the next year. If we were to see that, how would that dovetail into the number of consumers that are either signing up as members in Costco or leaning into some of the broader, kind of buying-in-bulk patterns of spending?

SUCHARITA KODALI: Yeah, what is important about Costco's business is that it does tend to be fairly recession-proof, similar to other mass merchants like Walmart, in large part because when a consumer may have lower expectations for the future, they're going to fly to value, and Costco absolutely offers that. We've known that, historically, most-- their profit, for the most part, their net income is their-- is very correlated to their membership fees. They're not really making that much money off of the sale of the physical goods themselves, and that very much is about passing value onto shoppers. It is very much about providing the best value and the best product assortment that you can for the consumer.

I mean, Costco has been incredibly well-managed as a company pretty much since its inception. I mean, 10 years ago, it was a $100-billion retailer. Now it's $200 billion.

I know that its stock today may be taking a mild hit. But when you also step back and look at its performance over time, its stock price is at nearly its high. Its highest was, I think, last spring in 2022. It's comping that, and it is very comparable to the overall NASDAQ index. So it's actually-- overall, when you step back and look at the macro, and you look back at the bigger picture, it's actually doing very, very well. It's held up in spite of some of these issues related to consumer confidence and the fact that people are pulling back from discretionary.