Based on Costco (COST +0.51%) stock's 8% decline at the time of this writing on Friday, it might look like the club retailer totally whiffed when it came to its first quarter of fiscal 2019. After the company reported its results for the period after market close on Thursday, shares were slammed on Friday. Some investors may have concerns about rising merchandise costs, as the company missed a consensus analyst estimate for adjusted earnings per share by one cent.
But a closer look at the wholesale club retailer's results shows a more promising story. Sales growth is accelerating, renewal rates remain strong, and e-commerce continues to gain momentum. Sure, investors may want to keep an eye on factors weighing on earnings, but they should also give weight to the company's strong sales traction with its members.
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Strong growth
An overview of Costco's sales strength reveals some promising trends.
First of all, Costco's comparable sales increased 7.5% year over year when excluding the impact of changes in gasoline prices and foreign exchange rates. This was an acceleration from 7.2% growth in the fourth quarter of fiscal 2018 and 7% in Q3. In other words, Costco's most important sales metric has been steadily gaining momentum recently.
Driving home just how strong Costco's growth has been of late, consider the strong comparisons the company is up against in year-ago periods. For Costco's first quarter of fiscal 2018 and its fourth and third quarters of fiscal 2017, comparable store sales growth rates when adjusted to exclude gas and inflation were 7.9%, 5.7%, and 5%, respectively. Achieving comparable sales growth of 7.5% on top of 7.9% growth in the year-ago quarter is notable, particularly during a period when many other brick-and-mortar retailers are seeing anemic growth at best.
Another metric highlighting Costco's momentum with customers is its membership fee growth. Membership fees rose 9.5% year over year in the company's first quarter. Highlighting the company's pricing power, about half of this increase in membership fee revenue was driven by fee rate increases. Further, despite higher membership fees, Costco's renewal rates remain at an impressive 90.5%.
Finally, e-commerce continued to deliver strong growth for Costco. E-commerce sales, when adjusted to exclude gas and inflation, rose 26.2% -- in line with growth rates in previous quarters.
Rising costs
While Costco's strong member spending and retention amid a fiercely competitive and evolving consumer landscape are encouraging for the company's long-term prospects, investors can't ignore the company's rising costs. Operating income in Costco's first quarter declined slightly, falling from $951 million in the year-ago quarter to $949 million. This was driven primarily by a 10.9% year-over-year increase in merchandise costs. If Costco can't grow its sales at a faster rate than merchandise costs, this could be a bad sign for the company's long-term potential.
However, it's unlikely that this will be a lasting problem, as Costco has typically done a great job managing its costs. Indeed, cost management helped Costco's operating income rise from $4.1 billion in fiscal 2017 to $4.5 billion in fiscal 2018, despite the fact that fiscal 2018 had one less week.
