Earnings: Costco gross margins fall amid higher costs, Big Lots misses estimates

Yahoo Finance Live anchors Julie Hyman and Jared Blikre breaks down earnings results for Costco and Big Lots.

Video transcript

JULIE HYMAN: We're just under five minutes back to the opening bell. And there are more retailers to talk about. It's not just Gap out today. Costco shares are trading down by about 2%. This is even after the company beat estimates. Let's dig into why here. First of all, yet another increase in inventories for this retailer. In this case, Costco reported inventories were up by 26%. That's more than the 19% jump they saw in inventories the prior quarter. Now, the company is saying they feel good about their ability to get the inventories back down, but margins were also under pressure, which is, I think people get used to Costco doing better than everything else.

JARED BLIKRE: Yeah, well, the thing is, they still got those hot dogs priced at $1.50, and that could be weighing on their margins as well. Here's a commentary from Oppenheimer, rating the stock outperform, price target of $500, not changing any of that. Costco's better than expected expense controls help to offset weaker gross margins. So that's what you're talking about.

Broker continues to see some headwinds, so that's the Oppenheimer, that the Costco bull case near term on the margin front and would take advantage of dips in the share price from here. In other words, buy the dips. Cowen saying-- Cowen-- excuse me, Costco saw strong comparable sales, though gross margin was worse than expected due to rising costs. Ongoing SG&A leverage helped mitigate EBIT margin downside. I love reading these things.

But here's on inflation-- while inflation continues to rise, the worst may be behind in certain categories. PCE ticking down today. I think people are reading into a lot of stuff too much right now. And it's kind of our job. We do this on a daily basis. But much like Brian Cheung was talking about the Fed, parsing the tea leaves in an environment like this is-- it's almost-- I don't want to say it's a fool's errand. It's just difficult because the outlook is so uncertain that companies themselves, oftentimes, don't have a grip.

And like you said, let's go to the charts here. I have a year to date chart of Costco, so we can see, like almost every other stock, this thing just kind of fell off a cliff in late April. Here is a three-year rolling view. And we can see it's still holding onto gains of 88%. This is a consumer staple. Very, very good execution historically. And this is what you would expect to see.

You're not going to see one of those bulging bicep charts where they just round trip all their pandemic gains. Kind of a steady company that just does well perennially. And this is where people put their cash during times of crisis. But as you can see, going back to this year to date chart, it's not like you put something in staples, and it holds up. Everything just goes down a little bit less in this category.

JULIE HYMAN: Yeah, I mean, and in the case of Costco, it's also performed a little bit better than retail in the aggregate. If you look at the XRT, which is the retail ETF, it's down about 25%, 26% year to date. And Costco's, quote unquote, "only down" about 18% year to date, so not as bad as certainly some of the worst performers there. Something else I want to mention, in terms of inflation, is, in the case of Costco, it is also like a Walmart or a Target in some cases, making a choice to keep prices at a certain level for its customers.

JARED BLIKRE: The hot dogs.

JULIE HYMAN: The hot dogs and also the membership fees, because even though membership fees were up 9.2% year over year-- they beat estimates, they were about $984 million-- the company says it's not the right time to raise membership fees, which is kind of interesting here in this environment that even though, obviously, Costco is absorbing those higher costs, it is deciding very deliberately, it's not going to pass them all onto its customers.

JARED BLIKRE: If I'm a customer and I hear that from Costco, that just makes me a much more loyal customer. They're going to eat it for a little bit so I can survive, you know?

JULIE HYMAN: Yeah.

JARED BLIKRE: It's a nice thing to do. People remember that. All right, we've got to move on to the Notorious B.I.G. Shares of Big Lots-- that's the ticker, BIG-- plunging following its prized miss on estimate. The company's CEO indicating the slowdown is a result from spending pressure facing consumer felt from higher gas prices and also broader inflation. So this is another one of those execution stories, I think. I mean, down 14% if you're not doing-- if you're not executing well in this environment, you're paying for it. And the shareholders are paying for it.

JULIE HYMAN: Gross margin here looking particularly lousy on a year over year basis, down to 36.7%. 40.2% was what it was a year earlier. And it's also below the analyst estimate. So inventory here, we've been seeing a lot of big increases in inventory here. 49% increase in inventory for Big Lots.