4 Ways Costco's Moat Is Widening

Costco's (NASDAQ: COST  ) latest earnings report will go down as a "miss" in Wall Street's accounting. That's because, technically, the warehouse retailer reported surprisingly soft results on both the top and bottom lines. It posted quarterly sales growth of only 1%, and a per-share profit improvement of just one penny.

But if you look beyond the headline numbers you'll see that Costco made impressive progress in some key areas this past quarter. Here are four of the biggest.

Member retention
Costco managed to improve on its already stellar membership renewal rates over the last few months. Business customers reupped at a rate of 94%, better than the 93.9% rate from last quarter. Regular Gold Star renewal rates ticked higher as well, to 89.1% from 88.9% three months ago.

It's hard to find a better indicator of the strength of your business model than this. For a membership-driven company, renewal rates mean a lot. And by that measure Costco is clearly delighting its customers.

Comparable sales growth
You could see evidence of that delight in the form of strong sales growth. Costco boosted comparable sales by 5% in the quarter that just closed, and by 6% over the last 52 weeks. Compare that to Wal-Mart, which only managed to improve sales by 1.4% at its Sam's Club locations through the first half of 2013.

Digging deeper still, Costco's comp growth was due completely to increased customer traffic, as shopping frequency rose by 4.5%. That points to a potential opportunity for Costco to raise its average transaction numbers in the quarters ahead. Customers are already frequenting its stores; Costco just has to find a way to entice them to toss a few more items into their carts.

Membership fees
Costco collected $716 million in membership fees in the quarter, which was a 3% improvement over last year. Those fees are critical, and not just because they make up three-quarters of Costco's operating profit.

Membership dues allow Costco to earn money while selling most of its merchandise at prices that competitors just can't match. And as the flow of those fees increases, so does that competitive advantage.

Store expansion
Finally, Costco opened 26 new warehouses over the last year, marking its biggest freshman class since 2008. About half of those stores were in the U.S., and Japan was also a standout with five new additions there.

But the company has even bigger plans for the year ahead, with 36 warehouses set to open over the next 52 weeks. That will add about 5% of selling space to Costco's already massive global footprint. And as these new stores build up their membership levels, they'll start contributing more to growth. Consider that Costco's newest stores averaged $105 million in annual sales last year, but the most mature stores raked in an average $166 million.

Foolish bottom line
Costco may have disappointed Wall Street by failing to hit sales and profit expectations this past quarter. Still, investors should be pleased with the company's progress in the areas that promise to really drive its business over the long term.

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