Costco (COST -0.80%) recently announced fiscal second-quarter earnings results that included some minor letdowns for investors. Customer traffic posted a rare decline in the period despite surging demand in the early days of the COVID-19 pandemic containment efforts.
The warehouse retailer also noted a slightly lower core gross profit margin, as it maintained low prices on in-demand products like consumer electronics. Yet Costco managed to improve on its industry-leading membership renewal rate, and that win bodes well for the chain's long-term sales and earnings trends.
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Nearly all the members who had the opportunity to cancel their subscriptions last quarter declined to do so. A full 91% of its U.S. shopper base chose to renew, in fact, which marks a slight increase from the 90.9% that Costco reported in each of the last three quarters. Costco counted 55.8 million member households at the end of Q3, up 500,000 compared to the prior quarter. Its global renewal rate was unchanged at 88.4%.
Strength in the renewal metric lifts Costco's results in both the short term and long term. The most direct impact is on earnings, which are driven mostly by membership income rather than product markups. Costco logged $815 million of membership fees this quarter, equating to 69% of its operating income. That figure rose from $776 million a year ago and reflects its status as more of a membership club than a retailer.
The longer-term impact is harder to track but shows up in areas like customer traffic, average spending per visit, and market share. Those results were more mixed this quarter.
Comps rose 8% in the U.S. market compared to a 12% spike at Walmart's (WMT -0.59%) Sam's Club. Costco showed much weaker customer traffic numbers, with transactions falling 2% compared to the 12% increase at Sam's Club. Yet the chain offset that decline with a 9% increase in average spending, while Walmart's comparable metric was flat.
Costco's management team was careful to note that any changes from COVID-19 consumer shifts will take a while to work through the business. "Any impact on renewal rates," CFO Richard Galanti said in the May 28 conference call, "positive or negative, are reflected over the next several months."
The good news is the chain had positive momentum heading into the crisis and through its first few weeks. Shoppers confirmed the value that they're getting from their membership by renewing at a near-record clip.
Investors will want to watch that metric, along with customer traffic, for any signs that the business is weakening toward the end of Costco's fiscal year. The traffic figure might be lower than shareholders have seen in the past few years as shoppers ramp up time spent away from home following social distancing lockdowns in March and April.
But at least through the latest retail industry disruption, Costco was a trusted outlet across its consumer staples and discretionary-product categories. Shareholders can view its increasing renewal rate as another data point supporting the chain's market-thumping long-term growth rate and a key factor that separates it from other consumer staples rivals.