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What to Expect When Costco Reports Sept. 29

By Daniel B. Kline - Sep 28, 2016 at 12:00PM

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The company faces some big problems, but it has been doing a good job of managing through them.

Costco Wholesale (COST 1.35%) stands at a crossroads.

The company has seen slowing growth, and it's possible that the warehouse club faces more than just an off quarter or two. It's possible, maybe even likely, that the chain faces a challenge to its business model.

For Costco, and warehouse clubs in general, success is dictated by the ability to sell memberships. Of course the club must have members to sell anything at all, but those membership fees account for more than two-thirds of the chain's profits.

The problem facing the warehouse club model is that its chief benefit -- offering cheaper items through bulk purchases -- may no longer be the draw it once was. (AMZN 3.15%), and to a lesser extent online stores from other big retailers, has cheap prices. In addition, those digital sellers do not require people to buy in quantities they may not actually need.

If consumers can buy from Amazon at roughly the price Costco charges without having to leave their homes or purchase in bulk, then it's easy to see why they may decide that joining the warehouse club no longer makes sense. What remains unknown, however, is exactly how much of Costco's business comes from people who are not only bargain hunters, but also enjoy the in-store experience.

These are consumers who join partly to hunt for deals, but also for the samples, floor displays, cheap hot dogs, and other things that make up the Costco experience. The exact makeup of the chain's membership remains unknown, making it unclear how vulnerable it is to Amazon and other digital players.

As the chain reports its fourth-quarter and full-year results Sept. 29, that makes its membership retention number and new-member signup rate the numbers to watch.

Costco sales have not been growing by as much as some investors would like. Image source: Author.

What we know so far

Costco already reported its sales numbers for August, which closed out its year. The company had 1% sales growth in the United States for the year, but saw sales drop 3% in Canada and 3% in the rest of its international territories for 0% growth overall.

Those numbers seem uninspiring, but when you factor out gasoline, which has been selling at or near historic lows for much of the year, the picture looks better. Without gas, the company grew sales 3% in the U.S., 8% in Canada, 4% internationally, and 4% overall.

Overall those are not stellar numbers, but they don't suggest a huge erosion in membership.

Credit card problems -- in the past?

One drag on Costco membership during the past year has been the company switching from an American Express card to a Visa (V 1.16%) provided by Citigroup (C 1.91%). The actual change, which took place June 20, was fraught with well-reported problems, but by most accounts those issues were solved quickly.

For the eight months prior to the June switch, the warehouse club did not take any new signups for the outgoing credit card. In theory, that stopped some consumers from joining Costco (as the card can serve as a membership ID), and constrained spending from others who bought less because they lacked access to the rewards offered by the loyalty card.

Once the new card was launched, however, demand exploded: Citigroup signed up over 950,000 new card members as of Sept. 6, Citi spokesperson Jennifer Bombardier told The Motley Fool via email. That's a very good sign that membership numbers will be strong in Q4, and that any negatives created by the credit card switchover have passed.

What to expect Sept. 29

While Costco's underlying business model may be in danger, those problems remain in the future. Based on its already-reported sales numbers and its impressive additions with the new reward card, it's unlikely the company saw a big drop in members in Q4.

That does not mean Costco has solved its problems, but it does mean the company has more time to address them. Barring any major surprises, it appears the chain has so far held off the wolves at its door. This has not been a stellar year, but given the circumstances it has been a decent enough one, and that's what the company should be reporting.

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Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
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$109.56 (3.15%) $3.35
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Visa Inc.
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