Costco limits purchases on paper goods, water & key items amid supply chain delays

Costco confirmed it will start limiting purchases on essential household products for what has become a perfect storm of supply chain delays for many retailers. 

"We are putting some limitations on key items like bath tissues, roll towels, Kirkland Signature water, high demand cleaning-related skews related to the uptick in the delta-related demand," Costco chief financial officer Richard Galanti said during the company’s fourth quarter earnings call. 

The wholesale retailer has already been warning customers to expect delays on select items. 

Costco's current supply chain and inflationary pressures, which include port delays, higher labor and freight costs, and shortages on everything from shipping containers, trucks, and drivers to various components, raw materials, and ingredients, have caused most of its general items to sell out within two weeks.  

"It's a lot of fun right now," Galanti joked. 

Galanti estimates that Costco's overall price inflation for its products is now in the 3.5% to 4.5% range, up from the previous quarter's estimate of 2.5% to 3.5%.

Both Costco and its suppliers are paying two to six times more for containers and shipping, 4% to 8% more for pulp and paper goods, 5% to 11% more for plastic and resin products such as trash bags, cups and plates and 3% to 10% more for certain apparel products. In addition, Costco has seen single-digit price increases for aluminum foil and cans for soda and other beverages and mid to high single-digit price increases on fresh foods, with meat leading the way with high single to low double digit price increases due to feed, labor and transportation costs. Commodities like oil, coffee and nuts are at five year highs, according to Costco's buyers.

He also warned that an ongoing chip shortage impacting Costco's electronics and appliances will likely extend into 2022.

"Despite all these issues, we continue to work to mitigate cost increases in a variety of different ways and hold down and or mitigate our price increases passed onto the members," Galanti said.

In order to combat these pressures, Costco is placing orders early to ensure it can obtain the products it needs in a timely manner. It also has chartered three vessels for the next year that will transport containers between Asia and the U.S. and Canada. Each ship can carry 800 to 1,000 containers at a time and the ships will make approximately ten deliveries total over the course of 2022.

Despite Costco's challenges, the company beat fourth quarter expectations on Thursday after experiencing strong customer demand in categories including jewelry, home furnishings, pharmacy, and sporting goods.

The company reported a profit of $1.67 billion, or $3.76 per share, up from $1.39 billion per share, or $3.13, a year ago. Total revenue came in at $62.67 billion, up from $53.38 billion a year ago. Wall Street was expecting earnings per share of $3.54 and total revenue of $61.45 billion.

In the U.S., comparable sales grew 14.9% during the fourth quarter and 14.8% for the full year, while comparable sales for Costco's e-commerce segment grew 11.2% for the quarter and 44.4% for the year. Excluding the impacts from changes in gasoline prices and foreign exchange, U.S. comparable sales grew 10.3% for the quarter and 13.6% for the full year, and e-commerce comparable sales grew 8.9% for the quarter and 42.6% for the full year. 

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