Craig Jelinek, the CEO of Costco (COST), gave a rare, exclusive interview to CNBC on Monday morning. The chief executive weighed in on consumer’s spending behavior, a potential U.S. recession and more. The interview came a few days after Costco reported strong same-store sales numbers for June , once again showing why the CNBC Investing Club believes it’s the best-run retailer in the world. Here’s a full breakdown of Jelinek’s comments to CNBC. 1. Consumer strength & recession fears Jelinek told CNBC he thinks that, overall, the economy is holding up OK, even though for many Americans persistently high inflation has been chipping away at discretionary income in recent months. At the same time, he said Costco is certainly mindful of economic slowdown fears. Those have intensified this year as economists and others on Wall Street question whether the Federal Reserve will be able to tame inflation with interest-rate hikes without tipping the U.S. into a recession. Worries about an impending recession have been one of the overhangs on the stock market lately, causing groups like retailers to underperform the S & P 500. “You never want to dismiss it. If you start dismissing a possible recession, you’re going to end up with a lot of inventory. In my opinion, it’s relative. … Everybody has a different way of explaining recession. In my view, it’s about what do you end up with [as] your discretionary income [and] what you’re able to buy. For a lot of people right now, they are in a recession because they are just trying to survive with just buying gas and making their house payments, rent payments. For people with higher income levels, they still have discretionary income to buy goods. We have a tendency to probably have middle- to upper-middle-income members in terms of our customers.” Recessions are generally declared following two straight quarters of contraction, or negative growth, in the U.S. economy. The official arbiter of recessions and expansions is the National Bureau of Economic Research, which says that such factors are not necessary for a recession. But every one since World War II saw consecutive quarters of contraction. The first quarter of 2022 saw negative growth of 1.6% in the U.S. economy. The government’s initial look at second-quarter gross domestic product is out July 28. While Costco’s CEO stressed that it’s impossible to know what the economy will look like three months in the future, Jelinek struck a positive tone about the situation now — as far as it concerns members to Costco’s wholesale warehouses. “We have our own Costco credit card that we have with Citi. They continue to grow every period. So our credit card business, the write-offs, have not seen any significant difference in write-offs, so right at the moment, we think things aren’t so bad.” 2. Changes to spending behavior Although Jelinek sounded content with the near-term outlook, he acknowledged there has been a change to the way consumers are spending. In particular, he said there’s been a slowdown to spending on electronics — a trend that other retailers like Target (TGT) have called out recently, too. Jim Cramer asked Jelinek whether that was because “the consumer was getting cautious,” to which the CEO responded: “The consumer could be getting cautious. One of the other areas I look at is jewelry. Jewelry was very strong. I see jewelry starting to slow down. You could read a couple of things into the hard-goods business. Television sets, computers, they have slowed down. But keep in mind, a year ago, a year and a half ago during Covid when everything was stay-at-home, computer business and TV business was off the charts. So it could be a combination of … people have done a lot of purchasing in those products, but also they may not need them at the moment, so that’s part of the transition also.” Jelinek, who has been CEO of Costco for a decade, said there is more to the story. “One of the things we are seeing is our patio furniture business is very strong in spite of the increase in cost based on freight issues. So, overall, I think the consumer is not doing bad. As you can see, unemployment is down significantly. If people want to work, they can work. So, my view at the moment, things aren’t so bad.” 3. Membership fee & special dividend updates We’ve called out a potential increase to Costco’s membership fee along with the possible issuance of a special dividend as two things that, if they occurred, could catalyze the company’s stock higher. W e discussed this Friday in our recap of Costco’s June monthly sales. While Jelinek would not commit either way on the special dividend, saying “stay tuned,” he offered fresh comments Monday on the membership question. We think about it every year. Right now, in terms of the membership fee, it is not on the table right at the moment. … I don’t think it’s the right time. Our signups continue to be strong, and we’ll let it go at that for the moment. You know, the special dividend, we’ve done I think three over the last six or seven years, and I’m not going to commit one way or the other, other than stay tuned.” The last time Costco raised membership fees was in 2017, taking its basic-level membership to $60 annually from $55 and its executive membership to $120 from $110. Membership fees are a key source of Costco’s profits. Also on Monday, Jelinek did quickly shoot down a question about whether Costco would raise the price of its hot-dog-and-soda combo , which has famously been $1.50 for decades. “No,” the CEO said. 4. Renewal rates When Costco reported third-quarter results in late May, management indicated on the conference call that membership renewal rates were at all-time highs at the end of the period: 92.3% in the U.S. and Canada and 90% worldwide for the first time. Costco generally sells its gas cheaper than nearby competing stations — and for that reason, Cramer asked Jelinek whether high gas prices have historically helped prop up renewal rates. “I don’t think so. Let me put it this way, it doesn’t hurt at all. But, I think, overall our value proposition on everything that we sell continues to help our renewal rate.” At the same time, earlier in the interview, Jelinek said he hopes the price of oil and gasoline continues their recent downward trajectory because “it’s what’s best for the country and everybody.” (Jim Cramer’s Charitable Trust is long COST. See here for a full list of the stocks.) 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Source: Business - cnbc.com
