It is easy to see a bright future for Costco. Sales in the third quarter 2021, (ended May 9, 2021) were well ahead of expectations. Net sales increased +21.7% to $44.4 Billion from $36.5 Billion last year. Net income for the quarter was $1.2 Billion or $2.75 per fully diluted share compared to last year’s $838 Million or $1.89 per fully diluted share.

During the quarter, the company opened 6 warehouses and now operates 809 warehouses. 559 of them are in the United States.  The company plans to reopen restaurants, albeit with more limited seating facilities, in the fourth quarter. At the same time, sample offerings will return, but their distribution will be more controlled and individual portions will be offered.

Despite the strong results and recent new openings, Costco cannot rest on its laurels. It has important issues to address and also some opportunities to develop. Like all businesses these days, the company is facing the inflationary pressure building across the economy. It has moved up the estimate of current inflation to about 2.5% with some more to come. Of note, that inflation was felt throughout the logistics area. Mr. Galanti, Costco’s CFO, stressed the problems stem from port delays, shipping delays, and increased supply chain costs. While Costco Logistics will mitigate costs by driving improvements to that will lead to more efficient operations, food costs have increased, an issue I pointed out in a recent report. For a company committed to delivering great value, these efficiency improvements are important.

At the same time, there is an opportunity because Costco is seeing a new customer. These shoppers have been younger and more interested in technology. Mr. Galanti pointed out that more women are joining as well. Those new customer segments present a source of growth for the future.

Costco recently also started to test curbside pickup at three locations in Albuquerque, New Mexico according to grocery business.com. The tests are on-going, and customer response has been above expectations. That’s not a surprise, since most general merchandise chain-stores have trained customers to pick-up their orders curbside. It is a good move as such service conveniences are just what those new customers want.


At the analyst meeting, future expansion was also discussed. The company plans several stores in the next few years in China and will also open 25 stores in each of the next two years. However, some of the listeners were pressuring for a faster opening schedule – at about 35 warehouses a year. Management did not indicate that this would happen quickly.

While e-commerce sales were up 41.2% in the quarter, Swiftly CEO Henry Kim said that “Costco will need to make dramatic shifts in its digital strategy. Today, Costco’s e-commerce sales are less than 4% that of Amazon AMZN . Costco’s competitors have realized they need to make bold investments in digital as Walmart WMT has 15,000 engineers and Target TGT employs 4,000 people in its IT staff. Costco will need to play a rapid game of catch-up or form very strategic partnerships with technology companies to compete.”

Mr. Kim also points out that massive advertising revenues enable Amazon to invest in a price-based strategy and shift purchases away from Costco. In other words, “Costco needs to find ways to bolster its media strategy”.

It is a new competitive world out there, especially when it comes to digital activity. Costco has to evolve and cannot maintain its pre-pandemic store strategies. It has new customers to sustain – a customer who is often younger and eager to buy but in need of quick service. The third party (Instacart) delivery service it has been using is down to half of its original user base, reflecting cost increases that signal a need to come up with a new approach.

Times have changed. In a world where everyone fights for share of market, Costco, who I consider a leader in the industry, must show inventive new ideas – to constantly improve its operations to keep costs in line and take bold steps to strengthen its digital presence. I believe they can do that. Costco is one of three stocks I recommend for long term investment – the other two are Home Depot HD and TJX Companies TJX .