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Costco earnings call worries investors despite beating estimates

Costco (COST) shares trend lower in Wednesday's pre-market session after reporting its fourth-quarter earnings results yesterday. While Costco beat earnings and revenue estimates, investors reacted negatively to other details: Costco cited weaker-than-expected same-store sales growth, higher wage expenses, and no plans to increase membership fees in its earnings call.

Yahoo Finance Reporter Brooke DiPalma breaks down the details of Costco's earnings call and what this means for the future of the company.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

BRAD SMITH: Let's talk Costco. Costco shares extending their losses in pre-market trading after the company reported its fourth fiscal quarter earnings Tuesday after the bell. The wholesale retailer beat analyst expectations on its top and bottom line, and comparable sales held steady even as gas prices surged. Investors, however, don't seem too pleased. Joining us now to break down why is Yahoo Finance's reporter Brooke DiPalma. Hey, Brooke.

BROOKE DIPALMA: Good morning, Brad. That's right. Costco beat on both the top and bottom line, but clearly Wall Street a bit spooked here at some of the key points that were mentioned in the call. Those three points include-- let's kick it off with that same-store sales miss. Same-store sales came in slightly higher than anticipated, up 1.1% compared to the estimates of 1.87%. Now, excluding gas and foreign exchange, sales jumped 3.8%. That also was slightly below expectations of 3.92%.

Now, what drove that same-store sales miss is the average ticket is still down 3.9% worldwide, and here in the US, that average ticket is down 4.5% from a year ago. Now, what we're seeing that's driving that ticket lower is weakness and bigger ticket discretionary items still holding on, as well as gas price deflation. JP Morgan out with note this morning, emphasizing that ticket growth has not been positive for Costco since 2022.

And moving right along, those higher wage expenses, Citi saying in a note today that Costco is still committed to investing in associate wages and made an unplanned investment in starting salaries for some new employees this week, which is off their typical cadence of every March.

Now, when asked on the call of how exactly wages compare to its competition when you think about Walmart that recently announced a change in their wage approach, the Costco said that, ultimately, the pressure comes from ourselves. They said that they provide the best hourly wage packet out there-- package out there with wages, benefits, and contributions. They also noted that their average US employee makes about $26 an hour in the highs 25s, and that's on top of what they say is a very rich health plan.

And once again, you know, what we've all been waiting to hear on both Main Street and Wall Street is, will they raise those membership fees? Well, not yet. Membership fees is a key revenue stream for the wholesale retailer. We saw it come in at $1.51 billion higher than Wall Street expectations of $1.46 billion. Paying household members is also up 7.9%.

But on the call, CFO Richard Galanti saying, quote, "It's a question of when, not if. You'll see it happen at some point. We can't really tell you if it's in our plans or not. We feel good, say, about all the attributions of member loyalty and member growth."

And yesterday afternoon, following the results, Yahoo Finance spoke to a CFRA analyst. He said that he expects Costco to raise membership fees by the end of this year. He expects that range will be about a $5 to $10 jump in what they currently have in both Costco Gold Star membership, which is now at $60 per year, and Executive membership, which now sits at $120 per year. So not if, but when. We'll keep watching.