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Costco Earnings: 3 Numbers to Watch

By Demitri Kalogeropoulos - Dec 8, 2017 at 6:20AM

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The metrics that could send the stock moving after earnings come out on Dec. 14.

Costco (COST 1.35%) will post its third-quarter earnings report next week, right in the heat of the holiday shopping season. We already know the world's second-largest retailer, behind Wal-Mart (WMT 0.86%), will have good news for investors about its sales growth pace. It might report healthy profit gains, too, as its recent membership price hike starts lifting the bottom line.

As usual, though, the details will determine just how strong Costco's business is looking relative to investor expectations. So let's look behind the headline sales and earnings figures that shareholders should see next week.

A customer walks through a warehouse aisle.

Image source: Getty Images.

Sales growth

There are plenty of reasons to expect healthy sales gains from this report. The biggest is that Costco recently revealed that comparable-store sales jumped 7.9% in November to mark its second straight month of accelerating growth.

Peers across the retailing industry are posting better results and raising their holiday outlooks, too, which bodes well for the leading warehouse giant. Chief rival Wal-Mart announced faster third-quarter comps last month and so did Target (TGT 0.81%). Meanwhile, Kroger (KR 1.71%) just closed the books on its third straight quarter of accelerating comps as consumers upped their shopping frequency.

Within the comps metric, I'll be watching customer traffic trends to see if they're keeping up their recent market-thumping pace. After slumping through most of 2016, Costco's membership traffic sped up to a 4% rate last quarter -- or about double the result that either Wal-Mart or Target managed. Holding that gap steady, or expanding it, would mean Costco is winning market share even as the industry's overall growth pace speeds up.

Fee income

Spiking membership fees formed the basis for Costco's 18% spike in net income last quarter, and investors will want to see this number keep climbing through fiscal 2018. After all, the retailer is opening new warehouses at a pace of roughly 28 per year, which is lifting its overall subscriber rolls. Meanwhile, Costco is succeeding at upgrading customers into its more profitable executive membership. Executive members now make up 39% of the subscriber base, up from 30% in 2008. Finally, members of both tiers are starting to pay the increased subscription rate that Costco announced last year.

Chart showing annual membership fee income.

Chart by author. Data source: Costco filings.

When you combine these positive trends, it's likely that Costco's fee income will expand significantly from the $2.6 billion mark it set last year.

Renewal rates

Costco gets most of its earnings from membership fees, not product sales, and so customer loyalty is more important to the business than the traditional retailing metric of gross profit margin. In fact, those subscriber charges allow Costco to operate at a far lower profitability level than its main competitors.

Renewal rates are investors' best indicators of customer loyalty, and these have recently fallen from the record high they set in 2015. Coupled with Costco's recent aggressive move into the e-commerce sales channel, that drop could be interpreted as a sign that the retailer is losing its grip on its core customer.

Costco renewal rates by year.

Chart by author. Data source: Costco.

However, management claims that the renewal rate decline was a temporary speed bump tied to the branded credit card switchover that disrupted new member signups last year. They also predicted a rebound in the metric beginning in fiscal 2018. This quarter's results will confirm whether that was the right reading. Thus, bulls will be looking for renewal rates to edge back up toward 91% from the 90% that they've been stuck at for most of the past two years.

Even just a tiny gain in customer loyalty, especially in the context of rising fees, would put Costco on track for significant profit growth in the new fiscal year.

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Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
COST
$485.76 (1.35%) $6.48
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$122.63 (0.86%) $1.05
Target Corporation Stock Quote
Target Corporation
TGT
$142.38 (0.81%) $1.15
The Kroger Co. Stock Quote
The Kroger Co.
KR
$48.14 (1.71%) $0.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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