Costco members get some sneaky bad news

Costco has a simple proposition for its members. 

You pay $60 for a gold membership or $120 for an executive membership and you get access to the chain's warehouses and website. (The higher-priced sub comes with 2% cashback up to $1,000.) 

Inside those warehouses members get to pick from a limited, but carefully curated, selection of merchandise designed to deliver the best value.

Costco (COST) - Get Free Report works relentlessly to keep prices down for members. The chain uses its huge buying power to work with vendors to help them save money so they can lower the prices it pays to acquire goods.

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That might mean simplifying packaging or allowing the vendor to place a larger order for raw materials. Sometimes, it's a combination of several factors, where Costco can place orders so big that its partners gain efficiencies by producing a single SKU — an individual item — in such a large quantity.

It's a formula that works: The chain has reported growth in membership sales every quarter for many years. Whether the economy is good or bad, Costco has what members need. and while they might buy different things at different times, people continue to find what they're looking for at good prices.

As we move into the holiday shopping season, however, Costco Chief Financial Officer Richard Galanti had some bad news for members who were hoping to find some of the extreme deals they got last year.

Costco often checks people's receipts as they leave.

Image source&colon Tim Boyle&solGetty Images

Costco has fixed its inventory problem

Last year, several major retailers — including Target  (TGT) - Get Free Report and Costco — found themselves with certain excess inventory. That occurred because as the chains headed into the holiday season following the covid pandemic, their data from previous periods was not that useful as they decided what to order.

Many retailers ended up with warehouses full of big-ticket items like televisions and certain appliances that consumers did not want. That was likely because consumers upgraded their TVs, redid their kitchens, and made other large-scale purchases during the covid lockdown periods. 

In 2022, the holiday season differed from previous years because demand for electronics, connected fitness devices, and other big-ticket categories had been pulled forward. That left some retailers, Costco included, with merchandise that was not in demand as much as it was in previous years.

That led to Costco and Target to offer deeper discounts to clear out warehouses and make room for the items customers actually wanted.

For 2023, however, that's not a problem for Costco — and that's sneaky bad news for members.

At Costco, don't expect as many deep deals

While Costco members can expect low prices on a good selection of holiday items, gifts and big-ticket products, they aren't going to see some of the deals it offered last year. Galanti discussed the matter during the chain's fourth-quarter-earnings call.

"Our year-over-year margin improvement has, in part, been due to fewer markdowns due to better inventory positions this year than last. Our inventories, overall, are in good shape," he said.

That may seem like an innocuous line during a long call, but it was actually a blaring beacon that the unique conditions that covid fallout caused last year won't repeat in 2023.

Galanti also said, though, that Costco's prices won't be heavily affected by another factor rivals Target and Walmart have complained about. 

"We are asked often recently about our inventory shrinkage results and whether it has dramatically increased in the past year versus historical shrink results," he said, using the industry term for theft. 

"The answer is no. In the past several years, our inventory shrink has increased by a couple of basis points, in part, we believe, due to the rollout of self-checkout. Over the past year, it has increased by less than 1 basis point more. So, no, thankfully, not a big issue for us."

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