Costco store traffic rebounds; sales dip

Food deflation takes toll on overall customer spending at warehouse.

Costco Wholesale Corp. attracted more shoppers last quarter, easing concerns of analysts and investors, even as food deflation and industrywide discounting squeezed sales at the largest U.S. warehouse chain.

Shopping frequency grew 2.2 percent, though the average amount people spent dipped 1.3 percent, the Issaquah, Washington-based company said on Wednesday. Wall Street had grown concerned that Costco customers would defect to Amazon.com Inc. and other rivals as the company’s warehouse model lost its novelty.

“The traffic has seemed to have hit a trough and have come back a little,” Chief Financial Officer Richard Galanti said on a conference call. “It certainly seems like it’s back on the mend.”

Shares of the company rose as much as 4 percent to $159.96 in New York trading Thursday. Before the rally, the stock had dropped 4.7 percent this year.

The traffic gain helped samestore sales climb 2 percent, when excluding gas and foreign-exchange effects. Competitive prices and a good selection of merchandise — providing customers with a “treasure hunt” experience — is helping Costco maintain its edge, said Cowen & Co. analyst Oliver Chen. Still, the company needs to win over younger shoppers and modernize the chain if it wants to compete with the likes of Amazon in the long term, he said.

“Modernization is really necessary,” he said in a note. “The treasure hunt needs an integrated online experience.”

A historic streak of food deflation also has spurred competition

in the industry and weighed on sales.

“There have been some huge swings,” Galanti said. Nuts are down 35 percent, he said. “Eggs, of course, are down well over 60 percent year over year.”

Though that’s helping in certain areas, such as baked goods, the situation means less money is coming in the door. Though Costco’s total revenue grew 3.2 percent to $28.1 billion, that missed the $28.3 billion predicted by analysts.

SCOTT MCINTYRE / BLOOMBERG A customer stands by a shopping cart inside a Costco Wholesale Corp. store in Miami Monday. Chief Financial Officer RIchard Galanta says store traffic is “back on the mend.”