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3 Things Costco Wants You to Know

By Demitri Kalogeropoulos - Dec 16, 2017 at 12:00PM

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Highlights from the warehouse giant's strong fiscal first-quarter report.

Many retailers are posting improving operating results these days as consumer spending marches higher. But the numbers that Costco (COST 0.60%) just announced stand out as particularly strong. The warehouse giant on Thursday revealed sharply higher sales growth -- both in its stores and online -- spiking membership fees, and a healthy jump in net income.

Chief Financial Officer Richard Galanti held a conference call with Wall Street analysts to put those operating trends into perspective. Below are a few highlights from that presentation (all quotes are Galanti's).  

Strong store traffic

First-quarter traffic was up 5.9% worldwide and 6.6% in the U.S.

Costco's sales at existing locations, or comps, improved by 7.9% to kick fiscal 2018 off with a bang. That figure represents a major growth acceleration, given that comps came in at 4% in each of the past two fiscal years.

A customer walks through a warehouse aisle.

Image source: Getty Images.

Customer traffic gains made all the difference. In fact, shopper transactions sped up from a 4% pace last quarter to nearly 7%, putting Costco well ahead of rival retailers. Wal-Mart Stores(WMT -0.38%) Sam's Club recently posted a 3.6% traffic bump that powered its 2.8% comps improvement. Target (TGT -1.76%) traffic rose by 1.4% as part of a 1% comps increase for that retailer.

Costco is also posting higher average spending per shopper visit while both Wal-Mart and Target announced shrinking results on this metric as they cut prices to attract more customers.

E-commerce opportunities

E-commerce sales were $1.3 billion, up 40% year over year. We continue to improve our offerings and we continue to improve our member experience with better sales, checkouts and returns processes. Our site traffic conversion rates and traffic were up nicely year over year and we enjoyed basically stronger metrics for both the Thanksgiving, Black Friday week as well as Cyber Monday.

Costco attacked the online selling opportunity from a few different angles during the quarter, including by testing out two-day dry grocery delivery options and same-day delivery choices for many of its perishable food items. Investments in its website yielded better sales growth and improved customer satisfaction, which culminated in a 40% spike in overall revenue.

A Costco cart.

Image source: Costco.

The best news for shareholders on this score is that Costco isn't being forced to choose between a booming online business and healthy results at its physical warehouses. On the contrary, in a win-win for both segments, e-commerce promotions drove traffic to its shops during the quarter while in-store signage helped power faster growth in the digital channel.

Healthy membership metrics

We feel very good about our renewal rates and so far so good on...the impact of the credit card switch.

Costco's 17% profit increase was helped along by a 10% spike in fee income, which benefited from both the rising subscriber base (there were seven new warehouse openings in the quarter) and the membership fee hike that the retailer announced last year. The earnings lift from that price hike will only accelerate over the next few quarters, management said, as it impacts a larger portion of the subscriber base through the fiscal year.

Renewal rates held steady at 90%, which is a bit of a surprise given that management had predicted they would begin climbing back toward 91% as the impact faded from Costco's disruptive credit card switchover. Still, renewal rates didn't decline even as membership fees increased. If anything, the retailer's healthy traffic trends show that members are getting plenty of value out of their subscriptions.

Investor takeaway

Shareholders might have liked to see improving renewal rates this quarter, but that slight miss doesn't detract much from an otherwise impressive quarterly report. Ultimately, Costco's core warehouse business is growing at a market-thumping rate today at the same time that management finds new ways to incorporate the online channel into its retailing strategy. These wins put Costco on track for a great fiscal 2018 ahead.

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Stocks Mentioned

Costco Wholesale Corporation Stock Quote
Costco Wholesale Corporation
$471.42 (0.60%) $2.81
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$121.91 (-0.38%) $0.46
Target Corporation Stock Quote
Target Corporation
$141.98 (-1.76%) $-2.54

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