Costco Wholesale Corp. (COST) rolled out two new online delivery options as it seeks to compete with Amazon.com Inc. (AMZN - Get Report) and Walmart Stores Inc. (WMT - Get Report) for internet food dollars.
The services rolled out earlier this week, Costco CFO Richard Galanti said on a Thursday, Oct. 5, call with analysts. Through Costco Grocery, customers can order from a selection of just under 500 nonperishable foods and sundries and have the items delivered to their homes in two days or less, with free delivery for orders above $75. And secondly, Costco is partnering with delivery startup Instacart for same-day delivery of about 1,700 fresh and dry items, available currently at 376 U.S. Costco locations.
"We see this as a huge positive for Costco given the perception that Costco has been slow with its pace of digital transformation," BMO Capital Markets Corp. analyst Kelly Bania wrote in a note. "However, we also see risk these initiatives will weigh on margins over time and may be viewed as defensive."
Galanti noted on the call that Costco has to "figure out how to communicate" its low online prices to customers, "but that should continue to drive our business."
The new online offerings "could drive increased engagement with millennials," wrote Jefferies LLC's Daniel Binder, and should increase Costco's sales "provided they don't simply cannibalize core sales."
Walmart has aggressively increased its e-commerce offerings since its $3.3 billion acquisition of Jet.com last year and subsequent reorganization of its e-commerce division, while Amazon, which has struggled in the grocery category, is doubling down after its $13.7 billion acquisition of Whole Foods.
Costco's e-commerce sales grew 21% year-over-year in the quarter ending Sept. 3, accelerating from an 11% increase the prior quarter. Full-year earnings of $6.08 per share and sales of $129 billion both topped analysts' expectations. Analysts were concerned, however, with the slight drop in renewal rates to 87.2% from 87.5% the prior quarter.
Costco shares fell 4% to $160.45 in premarket trading Friday.
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Editors' pick: Originally published Oct. 6.