To ensure Costco stocks the right amount of items going into the winter, the warehouse chain's CFO, Richard Galanti, is keeping a close eye on working capital and inventory levels.
Sales figures have improved, but traffic has not returned to pre-pandemic levels, Grocery Dive reported last week. In its latest earnings call, Galanti said the company believes its warehouses' large size, compared with other retail locations, has helped make customers feel more comfortable with in-person shopping.
Despite its improved outlook, the chain has struggled to maintain inventory levels on popular items such as household cleaners and work-from-home set-ups.
While Costco expected the pandemic to result in robust sales of essentials, it was nonetheless surprised in across-the-board performance, including in its fresh food sector.
"We don't have spoilage. We sell out, not literally, but almost literally, to the piece on these things, so [we're] not throwing stuff away," Galanti said on a call with analysts last week. "It's a great business, from a gross margin dollar perspective, given the sales strength in it."
Unexpected demand forced Costco to reverse inventory decisions it had made earlier in the year, Grocery Dive reported.
"Where, in some instances, we tried to cut back a few orders in March and April for seasonal summer goods like patio furniture, very quickly we [had] to scramble for more of those," Galanti said.
Costco does not intend to offer curbside pickup at its warehouses, despite the success other food retailers have had with the service. "Some retailers are doing [that] because they feel they have to," Galanti said. "We don't have our head in the sand on it. We look at it. We have people here that study it and maybe we'll surprise you one day, but at this juncture we're not prepared to do that."
The hesitance to offer the service is unlikely to hurt Costco's bottom line; it's already running laps around several close competitors, Retail Dive reported Wednesday, adding Costco historically has maintained good performance amid shaky economies, including during the Great Recession.
Costco's supply chain management marks a great improvement from its early March position. At the time, Galanti said Costco's procurement team "worked around the clock to procure supplies for both existing suppliers and from other sources where possible" to keep up with new demand, Supply Chain Dive reported.
"The supply chain continues to improve, but it will still take six to nine months on some categories or products," Galanti told the Wall Street Journal, adding that having a surplus of popular products meant Costco had to find more suppliers, and decide which products to order less of.
Overall inventory levels rose 7% to $12.2 billion in the year ended Aug. 30 compared with the prior year, Costco shared in its earnings report last week.
For instance, Costco usually stocks paper towels, a hot item, from two suppliers, but is now buying from as many as four manufacturers, Galanti said.
Costco also decided to store seasonal items, like patio furniture, to sell next year instead of discounting them. Costco has to pay vendors for these products now, resulting in an increase in working capital as well as inventory, Galanti told the Journal.
Simultaneously, Costco is taking longer to pay its suppliers. Commercial credit report provider CreditRiskMonitor told the Journal Costco's accounts payable rose by 21% to $14.2 billion. Galanti said the higher payables stem from faster-than-usual inventory sales.
At the beginning of the pandemic, Costco sold $4 billion in bonds in an effort to "increase liquidity and prepare for a range of worst-case scenarios," the Journal said. It can breathe a little easier now; Costco's same-store sales rose over 14% year-over-year in its most recent quarter.