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3 Big Takeaways From Costco's Fourth-Quarter Report

By Demitri Kalogeropoulos – Oct 10, 2018 at 5:46PM

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The warehouse retailing giant is enjoying its best customer traffic growth in years.

Investors had high hopes that Costco (COST 0.80%) would report broadly improving business trends in its fourth-quarter earnings results. The warehouse retailing giant's stock dipped immediately following the report, but mainly because the company revealed that parts of its IT accounting infrastructure had been vulnerable to unauthorized use.

It will be a while before investors can be sure that this weakness won't result in any accounting restatements. In the meantime, shareholders can take comfort in the fact that Costco's operating results are as strong as ever.

Let's take a look at a few standout metrics from the fourth quarter and the broader 2018 fiscal year.

A shopper browses the aisles at a warehouse retailer.

Image source: Getty Images.

Customer traffic: up 4.9%

Investors knew heading into the report that demand trends were healthy, with comparable-store sales rising 7% for the quarter. We learned in this report that the gains were powered by robust customer traffic growth of just below 5%.

That represents a healthy acceleration for Costco when compared to the prior year, and it also kept the company well above rival Walmart and its 2.2% increase. After slowing in 2016 and 2017, customer traffic growth is now "as strong as it's ever been," CFO Richard Galanti said in the earnings conference call.

Membership renewal rate: up to 90.4%

Costco earns most of its profits from membership subscriptions rather than the markup it charges on product sales. That business approach makes its subscriber metrics at least as important as its revenue trends.

That's why it's good news for investors to see Costco's renewal rate jump up to 90.4% from 90.1% in the prior quarter. Renewal rates fell in fiscal 2017, and management said the decline would reverse itself over time as the disruption from its credit card switchover faded. That valuable rebound is exactly what shareholders are seeing today.

E-commerce sales: up 32%

The booming traffic and membership figures imply that, contrary to fears around this time last year, the retailer is having no trouble growing even as consumers shift more spending toward e-commerce shopping methods. Costco isn't ignoring that sales channel at all, and in fact, it has directed significant resources toward building up its online catalog and adding two-day and same-day delivery from its local stores.

Executives say they're still doing all they can to convince members to make physical trips through initiatives like aggressive pricing on fuel. "First and foremost," Galanti explained, "we want to get you to the facility." But Costco still has plans to continue boosting its digital business beyond its current perch at roughly 4% of overall sales. Peers like Target and Home Depot, who operate many more stores across the country, count e-commerce at closer to 6% of their businesses.

What about 2019?

Tariffs, and the higher prices they bring, will be a big challenge that will play out over the coming quarters. Costco is doing what it can to offset or at least delay the negative impact from those spikes. For example, it's accelerating shipments so they come in before tariffs go into effect. In some cases, the retailer can shift to sourcing from other countries, too, or use its massive sales footprint to negotiate better prices.

The good news is that these challenges will also affect Costco's rivals, most of whom have much more to lose in terms of profitability. If anything, then, a tough pricing environment might allow the company to steal additional market share from rivals in fiscal 2019. After all, membership renewal trends are near record highs despite higher subscription prices, so Costco has room to keep an aggressive floor on prices going forward while continuing to generate healthy earnings growth for investors.

Demitrios Kalogeropoulos owns shares of Costco Wholesale and Home Depot. The Motley Fool has the following options: short February 2019 $185 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Costco Wholesale and Home Depot. The Motley Fool has a disclosure policy.

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