Costco Wholesale (COST -0.55%) is -- as its name suggests -- a wholesale club, much like Walmart's Sam's Club or BJ's. These businesses are no doubt retail operations, but they don't operate the same way as a department store or grocery store. And that's an important difference that smart investors know when they examine Costco's results.
Here's a closer look at the math that underlies this vital distinction.
Members
When a company like Macy's reports financial results, they may bring up the traffic their stores generate. Basically, management is telling investors if more people are shopping or fewer people are shopping at the company's stores. Some stores are stickier than others. Grocery stores, for example, see regular weekly traffic, while a department store like Macy's is likely to be a less-frequent shopping excursion for most consumers. Same-store sales is a pretty normal figure in the retail sector, at least partly because most stores don't have a relationship with their customers outside of those customers actually choosing to show up and spend money.
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Costco reports comparable store sales, too. And the numbers have been strong of late. In fiscal 2022, which ended in August, same-store sales rose a pleasing 14.4%. However, there's another number in the mix that's equally important: members. At the end of fiscal 2022, the company had roughly 65.8 million paid household members, up 6.5% year over year. That tidbit was revealed during Costco's fourth-quarter 2022 earnings conference call when management also noted that the store count only increased by about 3%. So membership growth was pretty impressive, all things considered.
Remember, these are customers that are paying for the privilege of shopping at Costco. And since they've paid, it is highly likely that they will go on a regular basis. In order to keep these club members coming back, Costco works very hard to keep the prices at its stores low. And that's where some perhaps shocking math comes in.
The big number
In fiscal 2022, Costco generated revenue of $226.954 billion. Of that, product sales accounted for $222.73 billion, or roughly 98%. The remaining two percent or so is attributable to club fees, at $4.224 billion. In most cases, that would be a figure that investors could safely pay only transitory attention to, but not at Costco.
That's because just a little further down the income statement, you'll find that the cost of goods sold was $199.382 billion. And selling, general, and administrative expenses totaled $19.779 billion. Put those together, and you get $219.161 billion, which is effectively the cost of operating the company's retail operation. Using back-of-the-envelope math, the company's stores generated pre-tax profits, excluding "other" items, of around $3.569 billion.
This is where the story gets really interesting. The company generated pre-tax profit of $7.84 billion. The membership dues that customers pay to shop at Costco totaled $4.224 billion in fiscal 2022. So more than half of the company's pre-tax profits is really attributable to member fees. Membership levels, and thus membership fees, are, in some ways, more important than product sales. It's why the company is often willing to sell products at shockingly low prices, because it can afford narrow retail margins if it gets you to keep paying your member dues.
Not your ordinary retailer
Costco directly competes with other companies, so this model isn't unique. However, the smartest investors know that product sales only tell part of the Costco story. If you aren't paying very close attention to membership levels and membership fees, you are missing the most important part of the picture at Costco.
