While seemingly every other retailer looks for how it can change in order to take on Amazon (AMZN 3.89%), Costco (COST +0.45%) keeps succeeding by staying true to what it has always done.
The warehouse club, which has largely ignored the internet, has remained a draw to its loyal audience by offering a combination of value and shopping experience. It's a formula that has driven traffic to the company's stand-alone stores on a remarkably steady basis.
In the chain's first quarter of fiscal 2017, which ended on Nov. 20, it saw net sales come in at $27.47 billion, an increase of 3% from the year-ago quarter. In addition, same-store sales were up 1% in the United States, up 4% in Canada, flat internationally, and up 1% for the total company. Those numbers look even better when you factor out lower gas prices and foreign exchange, with U.S. comp sales coming in the same, at plus 1%, Canada rising to 5%, international moving to positive 2%, and the whole company posting a 2% gain.
During Q1, Costco saw net income rise to $545 million, or $1.24 per diluted share, compared to $480 million, or $1.09 per diluted share, last year. These are solid numbers that show that the company has put any problems related to its switching rewards credit card providers well in the past. In addition, these results, which cover the time leading up to the critical holiday shopping season, suggest that while Amazon has taken market share from other retailers, Costco has remained more or less immune.
People have been steadily loyal to Costco. Image source: Costco.
Membership keeps growing
While stronger sales do help Costco's bottom line, membership growth is the company's most important metric. Since about 75% of profits come from people joining the warehouse club, adding members -- even if they never buy anything -- remains critical.
In Q1, the company saw a 6% increase in membership fees. Renewal rates came in at 90.3% for the U.S. and Canada and 88% worldwide. Those numbers are strong and CFO Richard Galanti explained during the Q1 earnings call how they show that any lingering impact from the reward card switches in both the U.S. and Canada have faded.
"As you know it's been probably almost two years in Canada when we converted to the Mastercard and with that we saw as we would have expected a slight decline in renewal rate," he said. "In Q4 2016 this past summer, we saw that finally reverse, and saw an uptick in renewal rates in Canada and that continued in Q1 of this fiscal year too. We are now seeing the same thing in the U.S." The earnings call was transcribed by Seeking Alpha (registration required).
Overall membership has continued to rise with household memberships climbing slightly to 47.9 million at the end of Q1, up from 47.6 million at the close of fiscal 2016. In addition, since many homes have more than one card, the total number of cardholders rose from 86.7 million at the close of Q4 to 87.3 million when Q1 ended. Galanti also reported that since the U.S. credit card switch on June 20, more than 1 million people have been approved to receive the chain's new Visa rewards card.
People like the warehouse club
There might be a day when Amazon saps business from Costco, but that's clearly not going to happen under current circumstances. In many cases, the online retailer offers cheaper prices and more choices, and does not force people to buy in bulk, yet people keep flocking to Costco.
That's partly because the warehouse club has a high perception of value and partly because people like shopping at Costco. The chain has mastered the concept of being a destination where it's about more than what you go home with. Visitors to Costco value not only the prices, but also the experience of discovery where you might enter looking for shampoo, but come home with an 8-foot stuffed bear.
Costco has remained relevant by staying true to its roots rather than adapting to fight its key digital rival. That should serve it well during the holiday period where it may not be a Black Friday or Cyber Monday winner, but it should benefit from steady traffic as the season progresses.
Costco has shown that slow and steady can win the race. The company never posts massive gains, but its results tend to be very consistent.
