Most retailers discuss store traffic as they hope that the product selection they offer brings customers back again and again. At Costco Wholesale (COST -0.32%), that's not the most important number. The key metric is membership. And right behind that is another number that would seem to make more sense for a magazine than for a store.
Here's what you need to know to understand just how successful Costco really is as a business. Let's dive in.
The big number
Costco charges a fee for using its store, making it what is often called a club store. There are basically two different levels of fees, with one level of membership for the average person and businesses and a higher-cost membership for "executive" members. (The key feature of the executive membership is a 2% cash-back reward.)
In fiscal 2022, member fees totaled roughly $4.2 billion versus $222.7 billion for store sales, both numbers that the company breaks out in its financial statements. That makes member fees seem pretty minor.
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However, if you consider the store as the prime source of the retailer's costs (merchandise costs and selling, general, and administrative expenses), the $4.2 billion in member fees accounted for more than half of the company's roughly $7.8 billion in operating income. Put simply, member fees are a huge and important earnings generator for Costco and a key reason why it is different from a company like Macy's.
Having so much income that is separate from the sale of products helps to create a competitive advantage. While most retailers have to focus on their profit margins (basically the difference between what it costs a retailer to buy and sell a product and what it charges end customers), which can be very tight in stores that sell similar things, Costco has more breathing room.
In fact, thanks to the membership fees, Costco can be more aggressive on prices, with its low costs being exactly what brings customers back through the doors.
One more number to know
If you own or are considering owning Costco, you need to get familiar with its membership figures. At the end of the first fiscal quarter of 2023, the company had 66.9 million member households. Households can have more than one membership card, as well, so the total number of cardholders is higher, at 120.9 million.
But don't stop there. A member is only valuable for as long as they are paying for their membership. If someone signs up and then lets the membership lapse, that's not a great outcome for Costco. It wants members who sign up and stay, which is why it is so noteworthy that the first quarter of fiscal 2023 had a member renewal rate of 92.5%. Basically, the vast majority of Costco customers appear happy to remain customers.
This creates an interesting dynamic. With such a high renewal rate, Costco's members are almost like an annuity that just keeps paying year after year. Adding new stores isn't just about selling more products; it's also about building an annuity-like income stream from the additional members. This is the brick-and-mortar equivalent of selling software with annual fees or, to go back to an even older medium, selling newspapers and magazines. And because the renewals are so high, Costco has a strong financial foundation on which to keep expanding its business over time.
A special model
Costco isn't the only wholesale store that uses the club model, but it has built an incredibly strong business thanks to the recurring membership fees it collects. Notably, these fees give it an edge when it comes to price competition with non-club stores and the wherewithal to keep growing its store count in good markets and bad.
But investors need to appreciate that while the membership fees are the dollar figure that's relevant, the renewal rate is right up there in importance. Renewals are what makes Costco's members so profitable to have.
Costco's stock currently trades a touch above its five-year average on both the price-to-sales and price-to-earnings ratios. So it isn't cheap. However, given the annuity-like nature of the business, it might still be attractive to growth-minded investors as the economy looks increasingly likely to face a rough patch.
