Costco (COST 1.01%) isn't your typical retailer -- it is actually a club, with membership fees. This fact changes the entire equation as you look at the stock. That is why, in three years time, Costco is likely to be just as great a place to shop as it is today. But here's how you can tell if that's actually the case.
Costco, the "exclusive" club
Although anybody willing to pay Costco's membership fee can shop at one of its stores, people who have not paid the fee cannot shop there. In fact, the retailer recently put in place steps to wean out people who were borrowing cards from actual club members. The goal wasn't really to stop people from buying, but to boost memberships. Still, the point is pretty clear. You have to pay to play -- or shop in this case.
Image source: Getty Images.
It's a very big deal. In fiscal 2023 revenue totaled $242.3 billion. Roughly $4.6 billion of that came from membership fees, which is tiny.
But here's the thing: Merchandise costs totaled $212.6 billion, and selling costs were around $21.6 billion. Those expenses relate almost entirely to selling products, not generating membership fee revenue. So nearly 57% of the company's operating profit of $8.1 billion was essentially driven by the $4.6 billion in membership fees. That's how important membership fees are to Costco.
This is why it is so vital for Costco to have high membership renewal rates. In the most recent quarter the renewal rate was 92.7% in the U.S. and Canada. In 2022 the renewal rate was 93% in North America and 90% worldwide. In 2021 those figures were 91% and 89%, respectively, and in 2020 they were 91% and 88%. You get the idea: high 80% to low 90% is what the company has historically achieved on the renewal front.
More of the same for Costco
As you look out over the next three years, it is reasonable to expect a similar level of renewal success. And that provides Costco with an annuity-like revenue stream to underpin its top and bottom lines. Keep a close eye on this figure when the company reports earnings. It usually isn't in the earnings news release, but historically it can be found in the accompanying presentation and in annual reports.
This is so important that the company goes to great lengths to ensure its customers are happy. One notable way it does that is by keeping product costs low. It can afford lower margins than peers because of the membership fees it charges. And having the lowest costs in town keeps customers happy.
It also works hard to keep its employees happy. If you go to a Costco regularly you will likely see the same employees over and over again. If you go long enough, you'll probably watch as employees rise up the ranks. That kind of employee longevity is a bit odd in the retail sector. However, happy employees create better shopping experiences for customers.
In fact, having happy shoppers is so vital that Costco actually started shipping its own products (by chartering its own boats) during the coronavirus pandemic. That was a material extra cost, but it allowed Costco the certainty that it could keep its shelves stocked at a time when other retailers were having trouble getting products to sell. That is how important it is for Costco to get members to renew.
Costco wants your loyalty
To some extent, Costco's sales will ebb and flow along with the economy. That's natural for a retailer. But what won't change over the next three years is the company's focus on keeping its customers happy, because that supports an important income stream. And you can keep tabs on that by watching its membership renewal rates.
If you own this stock, or are considering buying it, making sure that Costco generates consistently high renewals may actually be more important than monitoring its product sales.
