During the covid pandemic, Costco, and all retailers, had to deal with two major problems.
The first was the supply chain. Factories around the world closed, shipping slowed, and keeping stores and warehouses stocked became very difficult.
Costco (COST) moved aggressively to manage that situation. The company literally took shipping into its own hands, and it added inventory simply because if it didn't take items when they were offered, it might not have been able to get them later.
DON'T MISS: Costco Shares Some Important Pricing News
"As it relates to our inventories, again, if you had asked me six months ago -- in fact, I think it was Q4 and Q1 where year over year inventories were up 26% as was our competitors and everybody else," Costco Chief Financial Officer Richard Galanti said during his company's third-quarter-earnings call.
That excess inventory wasn't just a supply-chain issue. It also spoke to the second problem Costco and other retailers faced: Predicting demand became impossible. The pandemic disrupted replacement cycles for electronics, appliances, and many other big-ticket items.
In many ways, covid made it impossible for retailers to use past data to predict demand. and that left Costco with too much inventory for certain big-ticket items. That led to major discounts for members -- and now those days appear to be over.
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Costco Cuts a Major Giveback
Costco works with its vendors to ensure that its customers get the best possible deals. That's not just about pricing; it also applies to making sure that every available promotional dollar gets passed on to the warehouse club's members.
When Costco saw sales of big-ticket items slow at the same time that its inventory in those areas swelled, the company worked with its vendors to help move that merchandise. That included offering a lot of cash back.
Those deals have largely gone away, according to Galanti.
"Some of you have noted and called us on back, again, six, five, four, three months ago, we had a lot of promotional things going on. If you bought three or more thousand dollars of these 10 items, and they were all, like, different patio items or different in-store furniture items, if you did $3,000 or more, you got a $500 cash card on already great pricing," he said.
There was a major reason Costco needed to offer those deals.
"And that was a lot of our promotional money, markdown money, to get our inventories back in line, particularly on things where we were overinventoried because of the supply-chain delays," he added.
The company has largely solved its inventory overages and has dropped those promotional offers.
"On some examples, I think air conditioners might be an example," he added. "Because of the supply chains last summer, we did great in selling through fans and air conditioners.
"And these are not exact numbers, but let's say we plan to sell $500 million of it, easily 20%, 25% of it got here after the summer because of the supply chain challenges. There is no need to mark those down to try to get rid of them in September, October. We held them, and we're selling through them now, and that's not an issue at all."
Air conditioners don't generally change much from year to year. But it's a positive sign from the company that it has freed up the warehouse space to carry air conditioners over for next year.
Jjust six months ago that was not the case, forcing Costco to offer those heavy incentives on items that took up a lot of space.
Now, Galanti is encouraged by the company's inventory situation.
"We feel pretty good about where we are both on existing inventory levels of what we have in there and, as well as what we've committed to going forward for upcoming seasons, notably back-to-school and Christmas and things like that," he said.
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