Costco CEO predicts inflation’s turning point, explains how retailer keeps prices so low

Published Tue, Sep 13 20226:26 PM EDTUpdated Tue, Sep 13 20227:17 PM EDT

Costco (COST) CEO Craig Jelinek said Tuesday that stubbornly high inflation, which has been straining American consumers, is not going to permanent. The chief executive provided a promising prediction on inflation on the same day that a hotter-than-expected reading on August consumer prices was released. "I think you're going to see maybe another six months to a year, things will start to come down. If you start to see now, fuel prices are coming down which is a big part of distribution costs. Distribution is starting to level out and come down and container costs are starting to come down," Jelinek told Jim Cramer in an interview from Seattle. Jim has been sitting down over the past two days with CEOs from companies with their headquarters in Washington state. Shares of Costco dropped more than 5% on Tuesday, along with the other retailers and most stocks following that CPI print . It was a horrible market day. Part two of the inflation picture, the August producer price index, is out Wednesday. Costco's fiscal fourth quarter earnings results don't come out until next week, after-the-bell on Sept. 22 —but when reviewing the wholesaler retailer's monthly sales figures, Costco has continued to deliver strong sales even as consumers grapple with inflation. It's consistently reported a year-over-year increase in net sales every month this year. Most recently, August monthly sales at Costco increased 11.4% to $17.55 billion. These results show Costco has been doing exceptionally well during this inflationary period, which signals that it could fare well in a recession even as some consumers are cutting back on discretionary spending. Costco offers lower prices for greater value. But during an era where higher prices seem to be the answer to inflation, Cramer asked, how is it possible for Costco to keep prices down? Costco has what Jelinek calls a "vertical integrated" business model. This means, the food retailer produces some of its goods in-house rather than relying exclusively on suppliers. For example, the big box retailer produces and has their own ground beef plant and chicken factory. Costco has notably been able to maintain the price of its hot dogs, one of its signature food court items. Jelinek told CNBC in July that the company has been able to keep its hot dog and soda combo price at $1.50 for decades. He reiterated that to Jim on Tuesday, saying Costco manufactures its own hot dogs. Ultimately, this control allows Costco to keep prices down. It also allows them to have a better handle on their supply chain and manage its inventory more efficiently, two problems retailer competitors Walmart (WMT) and Target (TGT) have been struggling with. "We're very careful on our pricing," Jelinek said. "We've got a membership model and we have a responsibility to be the price police. We're always trying to figure out how we can lower prices, not raise prices. We're not a margin company, we're a volume company and these are the times that you look to build market share. Of course, there is inflation, like everyone else, we can't absorb it all, but we certainly try to figure out how to work with our suppliers to continue to lower prices." Jelinek also mentioned that now is not the time to raise the retailer's annual membership fee, even though Walmart -owned Sam's Club announced price increases on both their basic and premium membership offerings last month to combat persistently high inflation. This suggests Costco's finances are strong enough to hold back on raising its fees, a position some of its competitors wish they were in. Bottom line We found Jelinek's comments on inflation to be encouraging as it shows how crucial it was to get fuel prices down first. While we would have hoped for more clarity around the timing of a membership fee hike, we understand why management is steadfast in their belief that now is not the appropriate time. Costco is determined to do what's best for its loyal club members and would rather keep prices down to take market share than make a few extra dollars off each person. We admire this long-term thinking and continue to believe this is the best-run retailer in the world and it can weather any macro environment. (Jim Cramer's Charitable Trust is long COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Shoppers wait in a check-out line at a Costco wholesale store in Orlando, Florida.

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