Morning Note: Market news and an update from Costco.

Market News

US equity markets slipped back last night – S&P 500 (-0.6%), Nasdaq (-1.1%). Dell plunged 18% post-market after its first revenue increase since 2022 failed to impress investors who had high expectations for its AI server business. Gap surged 24% after sales topped estimates and it raised its full-year outlook.

This morning in Asia, markets were mixed: Nikkei 225 (+1.1%); Hang Seng (-0.1%); Shanghai Composite (-0.2%). China’s official May manufacturing and non-manufacturing PMIs missed estimates, a warning sign from the area of the economy that had been most reliant on to drive growth. Meanwhile, the Tokyo CPI, a leading gauge of national inflation, rose by 2.2% in May. This was above the central bank’s target and supports the case for raising rates.

The FTSE 100 is currently trading 0.1% higher at 8,246. The UK Government cut its NatWest stake by selling shares worth £1.24bn at a price of 316p per share. Following the sale, the government’s stake has fallen from 25.98% to 22.50%.

The Fed’s John Williams expects inflation to continue falling in the second half of 2024. Austan Goolsbee told CNN housing disinflation would be important in getting inflation back to target. Lorie Logan said high rates may not be as restrictive as believed. Ahead of today’s core PCE reading, the 10-year yields 4.56%, while gold trades at $2,342 an ounce. The oil price slipped to $81.80 a barrel as OPEC+ are believed to be working on a complex production cut deal for 2024-2025.

According to Nationwide, UK house prices returned to growth in May driven by strengthening consumer confidence. The annual rate of growth was measured at 1.3%. This comes despite the recent tick up in mortgage rates and figures showing a rise in the numbers of sellers in the market. Sterling trades at $1.2701 and €1.1740.

Source: Bloomberg

Company News

Last night, Costco Wholesale Corporation released results for the 12 weeks ended 12 May, the third quarter of its 2024 fiscal year. Performance remained resilient. Against a weak overall stock market backdrop, the shares fell by 2% in after-hours trading, leaving up 25% so far this year and on a market cap of c. $360bn.

Costco is the world’s third largest retailer. The company operates an international chain of membership warehouses that carry merchandise at substantially lower prices than are typically found at conventional wholesale or retail sources. In addition to grocery products, the company sells electronics, apparel, toys, health and beauty products, furniture, office equipment, and petrol.

The warehouses are designed to help small- to medium-sized businesses reduce costs in purchasing for resale and for everyday business use. Individuals also may purchase for their personal needs. Additionally, Costco Wholesale Industries operates manufacturing businesses, including special food packaging, optical laboratories, meat processing, and jewellery distribution.

The company currently operates 878 warehouses, including 753 in North America and the remainder in Europe and Asia. Costco also operates e-commerce sites in the US and across seven overseas markets. In the last financial year, the group generated annual sales of around $238bn from 130m cardholders, with renewal rates in the low 90s.

During the latest quarter, net sales increased by 9.1% to $57.4bn as the company benefitted from cash-strapped consumers flocking to its warehouses to grab low-priced groceries and discretionary items. Demand for groceries and bakery items was resilient as consumers preferred cooking more meals at home. The sale of gold and silver bullion was also strong.

Adjusted comparable sales, which exclude fuel and currency, grew by 6.5% in the quarter. This was made up of 6.1% growth in comparable traffic and 0.5% growth in comparable ticket. By geography, the US grew by 6.0%, Canada was up 7.4%, and the international business rose 8.5%. E-commerce sales grew by 20.7%.

The group also generates revenue from membership fees, which grew by 7.6% to $1,123m in the quarter, to give total revenue up 9.1% to $58.5bn, slightly better than the market forecast of $58.1bn.

The gross margin rose by 52 basis points to 10.84%. Adjusted EPS grew by 29% to $3.78, ahead of the market forecast of $3.70, albeit it helped in part by inclusion of a non-recurring charge to merchandise costs in the same quarter last year.

The group has a strong balance sheet with net cash of $2.2bn (including lease liabilities) at the quarter end. Since dividends payments were initiated in 2004, the payout has grown by in excess of 10% per annum. From time to time, the group also pays special dividends and repurchases its shares.

Source: Bloomberg