Costco's gold and silver sales are boosting same-store sales, but profit remains elusive, analysts say

By Ciara Linnane

Costco is selling up to $200 million of precious metals a month, according to estimates

Costco Wholesale Corp. is generating strong interest from its sale of gold and silver but with one caveat: It's unlikely to be making much profit from it.

That's the conclusion of Wells Fargo analysts who said Tuesday they expect Costco's (COST) precious metal sales are boosting same-store sales by about 1%, albeit with minimal profit.

The wholesaler began selling one-ounce gold bars in August/September of 2023 and followed with silver in late January. In its fiscal first-quarter, the company reported $100 million in sales. The 24-karat gold bars are Swiss-made and have reportedly been selling out since the launch.

"Our work suggests there has been significant interest given COST's aggressive pricing and high level of customer trust," Wells Fargo analysts led by Edward Kelly wrote in a note to clients. "The accelerating frequency of Reddit posts, quick online sellouts of product, and COST's robust monthly e-commerce sales suggests a sharp uptick in momentum since the launch."

Read now: Costco's 1-ounce gold bars selling out 'within a few hours'-again

Wells Fargo estimates that the company is selling up to $200 million of gold and silver a month, which in addition to the boost to same-store sales is likely adding 3% to general merchandise sales. The analysts are expecting the company to continue to see strong momentum in same-store sales, excluding the Easter Holiday shift this year, especially if the precious metals sale continue to resonate with customers.

The addition of precious metals is a smart move, that reinforces the company's value position, said the note. The company prices the product "attractively," offering members gold at about 2% above spot prices before a 2% cash back reward for executive members and another 2% in cash back for those with the Citi store card.

"That being said, pricing at that level and shipping costs suggests it's a very low profit business at best," said the analysts.

Wells Fargo has an equal weight rating on Costco's stock, while viewing it as one of the highest quality names in consumer. However, the risk/reward is relative balanced at its current price.

Gold prices have been on a tear this year, setting repeated records as a safe-haven investment fueled by expectations the Federal Reserve will start to lower interest rates again and by geopolitical tensions. It's also been the beneficiary of central bank buying, which has been the "tide lifting the floor/base price of gold," as Paul Wong, market strategist at Sprott Asset Management, said last week.

Overall, gold demand from central banks totaled 1,037.4 metric tons in 2023, just below the record high set in 2022 at 1,081.9 metric tons, according to the World Gold Council. Gold demand among central banks has been at more than 1,000 metric tons for the last two years.

For more, read: Gold hits another all-time high as investors take cues from near-record buying by central banks

Costco limits sales of its gold bars to five per customer. The company pitches the offering as another example of its effort to offer a range of products beyond its traditional food and household items.

The company did not immediately respond to a request for comment.

The stock was up 0.2% Wednesday and has gained 9% in the year to date, matching the S&P 500's SPX 9% gain.

Read also: Costco jumps on the weight-loss bandwagon with $179-for-three-months program

-Ciara Linnane

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04-10-24 1047ET

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