Goldman Sachs Equity Analyst Kate McShane joins Yahoo Finance Live to discuss Costco sales, consumer spending, the warehouse club business model, and more.
Video Transcript
SEANA SMITH: Shares of Costco closing the day lower, off just over 2% after the retailer reported its US same-store sales dropped 1 and 1/2% in March. Now, that is the first monthly decline for the retailer in nearly three years.
Here to dig further into these numbers and also talk about the retail space more broadly, we want to bring in Goldman Sachs equity analyst Kate McShane. Kate, it's good to see you here. So certainly the Street taking some issue with the results that we just got here from Costco. Anything that you're worried about in these sales numbers?
KATE MCSHANE: Yes, I mean, it was a surprise to the market, I think, the fact that things were a little bit weaker than expected. We had actually seen in February too a slightly weaker-than-expected same-store sales number out of Costco.
And, you know, part of it has to do with the fact that we are now in year four of very strong sales out of Costco. So as you lap, you know, strong sales, it does become harder and harder to grow off that. So I think that's something that definitely has to be considered.
I think the other piece too is is that there's quite a few pieces of the business to Costco. There's the consumable side, and there's the discretionary side. And the discretionary side includes big-ticket items like consumer electronics and other categories like that-- jewelry. And that's where the softer piece of this story has been. I don't think that is necessarily new news to the market necessarily or even based on what the headlines were reading is that, you know, discretionary is a softer category right now for the consumer.
DAVE BRIGGS: Nice to see you, Kate. It's a bit alarming, not just when you hear three years but when you think about what was happening three years ago. That was the early months of COVID, so it sounds like alarm bells there.
And Costco cites falling gas prices, foreign exchange in terms of their VP of finance. But is there any good news in here that perhaps food prices are falling and maybe that's a good consumer story, not investor in Costco?
KATE MCSHANE: Yeah I think that's fair. I mean, we have to remember too, you know, there's a number that includes gas and then there's a number that doesn't include gas. And that number that doesn't include gas was still positive for the month of March. It was up about 1%.
And the reason why you have to sometimes exclude gas is because there's just a lot of volatility in the price of gas, of course, and then in terms of what we are lapping. Gas prices a year ago were very high, and that resulted in Costco drawing a lot of traffic to their stores because they sold affordable, competitive gas. So that's something to keep in mind with regards to the comp.
But to your question about what the good news is, I do think they were impacted by some decelerating inflation. We definitely saw that in both the fresh category and the food and sundries category. And that has been, you know, somewhat anticipated that as the supply chain starts to improve that you will start to see some of these costs for the consumer to come down.
SEANA SMITH: Kate, you've got a buy rating on the stock, $538 price target. We closed today right around $485. What's the biggest catalyst that you see for Costco in the near future?
KATE MCSHANE: I think what we're most optimistic about with Costco is all the signups and memberships that they have seen in the last three years. The club model is very attractive, and what I mean by the club model is you pay a membership fee and then you get very attractive prices on the goods that you can buy there.
And, you know, what's so attractive about that is that we are dealing with a consumer that's dealing with still moderating but still quite a bit of inflation, especially in food, and we do think Costco is taking share there. So we don't really see that changing.
And then when it comes to the membership and the higher levels of membership and the higher amount of renewal, that's something that can compound over time. As the consumer learns more about Costco and becomes a more seasoned member, they will spend more. So I think the combination of just the model, Costco's execution, their bigger membership base, and the fact too that they are a global company-- there's still a lot of room for them to open stores and grow-- are why we remain bullish on the stock.
DAVE BRIGGS: You're also bullish on Walmart, and they're in the headlines this week. 2,000 e-commerce layoffs, and we found out the next day why. 65% of stores they'd like to see automation by 2026. Tell us about the buy and why a price target of $164 and what you make of the automation report from investor day.
KATE MCSHANE: Yes. I think starting with the investment thesis, this is the most excited we've been about Walmart in quite some time. We've been anticipating since we put Walmart on our conviction list here at Goldman since October 2021 that we would start to see an acceleration in the algorithm. And what I mean by that is that we would start to see faster growth out of this company. It's been a very long time that you've seen kind of flattish to only slightly positive growth in operating income dollars for this company ex the pandemic.
And a lot of that has had to do with the fact that they've had to invest in their business. They had to invest in wages. They had to invest in price. They had to invest in technology. And we're now at a point where all of those things are coming together, and the company is able to capitalize on a lot of those investments.
That coupled with the fact that they're entering new businesses that are more profitable just makes this story a more profitable story going forward, and we find that really exciting and a real change in terms of what we've been hearing from the company the last few years to what we expect to hear from them the next couple of years.
I think when it comes to automation, they are pretty, you know, far along the curve in terms of bringing automation both to their distribution centers and to the store. And it really is more about finding efficiencies and improving capacity in order to, you know, continue to grow and continue to make more margin.
And so that is something that we witnessed a couple of days ago with the company and, in essence, will allow them to become more efficient, allow them to do more of their e-commerce initiatives where they're seeing a lot of growth, which is their drive-up business and their pickup business, and just allow them to get the goods to the consumer in a more efficient way.
SEANA SMITH: All right, Kate, let's switch gears here and talk about a retailer that has clearly been struggling now for quite some time. That's Bed Bath & Beyond, and there was a movement today on reports that they want shareholders to approve a reverse stock split. Obviously they're doing this in an attempt to avoid a bankruptcy. Is there any scenario where that is still an option, where the retailer is going to be able to avoid bankruptcy? And do you see shareholders possibly approving this?
KATE MCSHANE: Yeah, so what we've written is that, you know, they've definitely done a lot to just kind of stay alive here. They've had a successful capital raise. They've had a couple of other announcements allowing them to, you know, just have better relationships with their vendors because really at the end of the day, you know, what they need in order to survive is to have product in the stores so that when people come in, they buy it.
And so, you know, that is something that we know the CEO is working very diligently on. We know there's been a lot of effort here to really start to stabilize the business.
I do think that, you know, having inventory and having the right inventory will help them. I think the question is is just in this environment where you do have a consumer that's a little bit more thoughtful about their spending exactly what it will yield for someone like Bed Bath & Beyond.
SEANA SMITH: Yeah, certainly a lot of questions there. Kate McShane, always great to speak with you. Thanks so much for taking the time. We appreciate it.