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Costco Made a Huge Mistake Just Like Walmart and Target

The warehouse club admits that it made some errors, but it has a plan to fix the issue that should delight members.

Before the pandemic, the average person probably rarely thought of the "supply chain" or even knew what it was. If you wanted anything -- from toilet paper to a big-screen television -- you either went to a store or jumped on your computer and bought whatever you needed.

Occasionally the exact thing you wanted was out, but having to buy a four-pack of paper towels instead of a two-pack hardly counts as adversity. Covid changed that as consumption patterns changed and retailers no longer knew exactly what to order. That caused both shortages and overages.

Walmart (WMT) - Get Free Report and Target (TGT) - Get Free Report, for example, both ended up with too many televisions this summer. Those big items clogged their warehouses taking room from the Items the retailers actually think they will sell this holiday season. To fix that, both retailers have been selling off merchandise at big discounts.

Costco (COST) - Get Free Report has similar inventory problems, but it has a different solution that both members and shareholders should like.

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Costco Has a Different Approach to Inventory

While Costco has hundreds of thousands fewer products that Walmart and Target, it's not immune to inventory and supply chain problems. The chain had some seasonal inventory come in late, which CFO Richard Galanti talked about during the warehouse club's fourth-quarter earnings call.

"Well, first of all, without being too specific, there's a decent chunk in there that I would call deep freeze from last year. My example I've used when talking to people is the Christmas trees that retail for $150 to $400. And they came in after Christmas or essentially after Christmas," he said. "And the good news is, is that they don't really change in style. And they're now -- and if you go to Costco, you're going to see it on the floor."

And, while there was some cost associated with sitting on those items for nine months or so, the CFO pointed out a major positive. 

"And if you add in the cost of holding them and a little cost of interest, I think they're still a little cheaper than the ones we added to the inventory this year. So in a perverse way, that one didn't hurt us that much other than we don't like to have extra inventory," he said.

Costco Added Inventory for the Holiday Season

Costco's overall inventory has climbed by 26%. That's a mix of supply chain issues and the company adjusting its ordering due to potential problems.

"There are some seasonal things that came in late," Galanti said. "Probably a bigger piece of the delta is us building up inventory, particularly on big and bulky and fulfillment, both e-com fulfillment and big and bulky. The last part is early holiday. We did consciously bring in some stuff."

Galanti added that the warehouse club has added insight into its supply chain and knows how long expected delays are.

"We bought stuff in consciously a little early. And then, as I mentioned, supply chain has improved a little," he said,

The warehouse club's Christmas tree problem was not unique, however and it will be sitting on some other seasonal merchandise that it should be able to sell.

"The other thing that's increased a little bit, even some things like seasonal things like air conditioning and fans, which was -- we had a very strong season, but there were some delays in getting that stuff in," he said.