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Here's Why The Best Is Yet to Come for Costco

By Daniel B. Kline – Apr 28, 2019 at 8:00AM

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The warehouse club has a very dedicated customer base.

Most companies wish they had the loyalty that Costco (COST -0.62%) has earned from its members. The warehouse club succeeds because when people join, they stay members. That immunizes the company against any changes in the retail landscape.

But Costco doesn't rest on its laurels. The company has evolved over the past few years, embracing digital and delivery. It was able do that slowly, however, taking the time to see what worked, because at its core it remains a club that people join in order to save money.

The exterior of a Costco warehouse.

Costco has steadily grown its membership. Image source: Costco.

Business is solid

While revenue and same-store sales are not Costco's most important metrics, the chain has done well in both areas. The chain reported net income of $889 million, or $2.01 per share in the second quarter, a 27% increase compared to the same quarter a year ago. In addition, the company delivered a 7.3% increase in net sales, and saw comparable store sales in the United States rise by 7.4%.

The most important numbers for Costco, however, are its renewal rates and the amount of new members it adds. And those numbers continue to be stellar as well. 

"In terms of renewal rates in the second quarter, our U.S. and Canada member renewal rates in Q2 came in at 90.7%, up from 90.5% 12 weeks earlier at Q1 end," CFO Richard Galanti said during the Q2 earnings call. "And, worldwide, the rate improved to 88.3%, up from 88% at Q1 end. So, improvement in our renewal rates."

Those numbers are stellar, and in line with the figures the company has steadily delivered quarter after quarter, year after year. They show that the company has a loyal customer base that has not left it even as digital options for low-cost shopping have increased. Costco has not just done a good job holding onto its customers, it's also adding to its membership base.

"In terms of the number of members at Q2 end, member households and total cardholders, we ended Q1 12 weeks earlier with 52.2 million member households. At Q2 end, there was 52.7 million," said Galanti. "And total cardholders increased from 95.4 million at Q1 end to, 12 weeks later at Q2 end, 96.3 million."

Costco has also continued to steadily grow its more expensive Executive membership base. That category closed Q2 at about 20 million, an increase of 341,000 since the close of Q1.

It's about loyalty

Costco's customers like the company's core value proposition. They've shown that they're going to remain loyal to the chain even if other choices might offer similar value and more convenience. The warehouse club was even able to raise its membership rates (albeit modestly) in June 2017 without seeing a drop in members.

There's nothing particularly exciting about Costco's business. It's a company that takes a slow and steady approach, with a laser focus on keeping its prices low and its merchandise mix interesting. That approach works: The company keeps growing its business, and there's no reason to believe that won't continue for the foreseeable future.

Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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