Costco operates a membership-based, no-frills retail model, predicated on offering a select product assortment in bulk quantities at bargain prices. The firm avoids maintaining costly product displays by keeping inventory on pallets and limits distribution expenses by storing its inventory at point of sale in the warehouse. Given Costco’s frugal cost structure, the firm is able to price its merchandise below competing retailers, driving high sales volume per warehouse and allowing the retailer to generate strong profits on thin margins. Costco operates over 600 warehouses in the United States and boasts over 60% market share in the domestic warehouse club industry. Internationally, Costco operates another 270 warehouses, primarily in markets such as Canada, Mexico, Japan, and the UK.

The Bureau of Economic Analysis (BEA) will update its forecast for GDP this morning. Last month, in its initial estimate, the BEA indicated that 1Q GDP grew at an annualized 1.6% pace. We expect that rate to hold -- though we note that from 1996 through 2022, the average revision from the advance estimate to the second estimate was plus or minus 0.5%. Key drivers behind the 1Q GDP increase included personal consumption expenditures, which grew at a respectable 2.5% annualized rate and contributed 1.68 percentage points to overall GDP expansion. Services remained strong, rising 4.0% and contributing 1.78 points to GDP growth. Consumption of goods declined 0.4% and acted as a drag for the first time since 4Q22, subtracting nine basis points (bps) from growth. Nondurable goods were flat. Durable goods were down 1.2% and cut nine basis points from output. If there is a consolation to the weak spending on goods it is that reports from the Commerce Department show that retail sales accelerated through the quarter, suggesting that the soft spending in 1Q may have been a hangover from a strong holiday rather than capitulation to recession. A surprising contributor to 1Q growth was residential fixed investment, which grew 13.9% and added 52 bps to GDP. Nonresidential investment grew 2.9%, with contributions from software and information processing equipment that probably fueled earnings in the tech sector. Inventory investments stripped 35 bps from GDP. Net exports subtracted 86 bps. The trade deficit doesn't worry us because it suggests that the U.S. economy is stronger than those of its trading partners, even with elevated interest rates. This may support the dollar and help contain inflation. The Atlanta Fed's GDPNow report is calling for 2Q24 growth of 3.5% based on the May 24 update. The New York Fed Staff Nowcast is 2.0% for the second quarter. Our 2Q estimate is 1.9%.

Costco operates 861 stores, for paying members, averaging 147,000 square feet each. Fees from the company's cardholders provided about 2% of its $242 billion in total FY23 revenue. Based in Issaquah, Washington, the company ended 4Q23 with 591 stores in the U.S. and Puerto Rico, 107 stores in Canada, 40 in Mexico, 29 in the United Kingdom, 33 in Japan, 14 in Taiwan, 18 in Korea, 15 in Australia, four in Spain, one in Iceland, one in New Zealand, and one in Sweden, two in France, and 5 in China. About 40% of sales are sundries (including candy, alcohol and tobacco); 13% fresh food; 26% non-food including hard-lines (such as electronics and appliances) and soft-lines (including apparel and jewelry); and 21% other ancillary businesses, including gas stations, pharmacy, optical, hearing aids and printing. International stores represent about 27% of total sales and 34% of operating income. At the end of 4Q22, Costco had approximately 126 million square feet of floor space. Online sales represent approximately 7%, and gas stations represent about 13% of company sales. The company's fiscal year ends on the Sunday closest to August 31. FY23 was a 53 week year. The company's fiscal calendar has 12 weeks in each of the first three quarters and 16 weeks in 4Q.

Weekly Tee Up: PCE, the Fed's Fav