Costco (COST 1.01%) stock has been a steady performer for investors this year. Shares have stayed ahead of the market rally so far in 2023 while beating rival retailers Walmart (WMT -0.08%) and Target (TGT 0.18%). The warehouse giant has a lot going for it as a business, including steady earnings that flow from subscription fees. Wall Street is also thrilled to see Costco's renewal rates holding at record highs.
The company's late August sales update added some fresh data for investors to parse ahead of the retailer's Q4 earnings report, due out on Sept. 26. Let's look at some of the key takeaways from that report to see whether Costco is maintaining its positive momentum as it closes out its fiscal 2023 year.
Shifting trends
At a glance, Costco's demand trends seemed to slow slightly. Comparable-store sales were up 4.1% in August, compared with 5% in the prior month. Zooming out, we see that comps were up 5.2% for the full fiscal year that ended in late August. Walmart enjoyed slightly faster growth in recent weeks, as its comps were up 6.4% in the core U.S. market last quarter.
The difference came down to the two retailers' e-commerce segments. Walmart posted a blazing 24% spike in digital sales last quarter, while Costco's e-commerce division shrank by 2.2%.
Costco's digital sales tend to tilt heavily toward consumer discretionary items such as home furnishings, jewelry, and electronics, which are exactly the types of products many shoppers are avoiding right now. In contrast, Walmart sells more consistently popular staples such as groceries through its online orders and in-store pickups. In that environment, you'd expect Costco to fare a bit worse in the e-commerce business against its main rival.
No earnings pressure
The good news is that Costco doesn't rely on those big-ticket sales to boost its profit margin. Peer retailer Target saw its profitability jump during the pandemic and has since suffered a sharp decline along with weaker demand for consumer discretionary products. Walmart endured a smaller decline in late 2022 and early 2023.
But Costco generates most of its earnings from subscription fees, which insulates the company from big swings in profit margin. You can see how this approach has protected profitability over the past year.
COST Operating Margin (TTM) data by YCharts
The retailer is happy to accept a lower overall profit margin in exchange for more stability and steadily rising market share.
What to watch
Given these latest trends, the big question heading into Costco's late September earnings report is whether customer traffic held up over the past few months and helped offset the weakness in the e-commerce segment. Executives said in the May earnings call that traffic was up a healthy 5% worldwide and higher by 4% in the core U.S. market. Investors will be watching that metric closely for any shift.
Costco will also update investors on its membership renewal rate, which held steady at an all-time high of 93% last quarter. Success here is great news for several reasons, including the fact that it will support the chain's ability to raise membership fees sometime over the next few quarters.
Just don't expect those higher fees to push Costco's profit margin higher. The company is determined to maintain its price leadership, meaning most excess earnings will be directed toward keeping prices lower. That approach leads to lower profits in the short term, but higher market share, and earnings, over the long term.
