Costco (COST 1.01%) has been killing it.
The warehouse club has shown that doubts about its long-term viability due to the so-called "retail apocalypse" are unfounded. The company saw net sales rise in the third quarter by more than 12%, consistent with its recent performance. In addition, the retailer saw same-store sales jump by 9.7% (7.7% when you exclude gas) in Q3 in its U.S. stores; earnings per share (EPS) came in at $1.70, up from $1.59 in the same period in 2017.
Digital sales continue to be a source of strength as well: They climbed 37% in Q3 and have risen by 36% so far this fiscal year. That's impressive because they followed similar gains in both periods during the previous year.
CFO Richard Galanti explained the results and laid out some of Costco's plans during the company's Q3 earnings call. He pointed out that Q3 traffic was up 5.1% worldwide and domestically, and he shared the company's ever-important renewal numbers.
Costco has posted strong same-store sales growth numbers. Image source: Costco.
1. Renewals are strong
When Costco raised its membership fees in June 2017, Galanti explained that the full impact of the changes would take two years to hit the bottom line. What has become clear in the first year, however, is that higher prices have not increased people dropping their memberships:
In terms of membership fee renewal rates, our U.S. and Canada member renewal rates at Q3 end came in at -- were 90.1%, similar to where they stood a quarter earlier at 90.1%. A slight uptick, but still rounding to the 90.1%. Worldwide rates improved ... to 87.5%, up from 87.3% 12 weeks ago at Q2 end, with the uptick in renewal rates in our international operations led by Asia, both Taiwan, Japan, and Korea.
2. Membership continues to rise
Costco closed Q2 at 50.4 million total members; in Q3 it added 500,000 new ones to finish at 50.9 million. Total cardholders rose from 92.2 million at the close of Q2 to 93 million when Q3 finished.
"As of Q3 end, our paid executive member base stood at 19 million households," said Galanti. "That's an increase of 199,000 households from 12 weeks earlier, about 17,000 new Gold Star members per week."
3. The company is growing
While the warehouse club does not grow quickly, it grows steadily. The chain opened seven new locations in Q1, one in Q2, and two in Q3; it has 15 planned for Q4. That's a total of 25 new warehouses for the full year, though it's actually only 21 new markets, as four are relocations to what Galanti called "better and larger facilities."
4. Online is a high point
The CFO said the chain's strong digital sales growth came partly from expanded offerings, partly from delivering a better digital experience, and "first and foremost" from offering better prices. He noted that more people are opening emails sent from Costco and acting on them.
"In the third quarter, our site traffic conversion rates and orders were extending and improved year over year. And again, we would expect that to continue, at least in the near term," he said.
A position of strength
Costco has taken a slow and steady approach to modernizing. It did not rush into digital, and that has proven to be a smart play. Instead, the warehouse chain has let others innovate and then made changes to serve its membership bases. That's the most important piece of the puzzle for the chain: Keep the members happy -- which it clearly has -- and everything else will fall into place.
