I recently upgraded to a video iPod from Apple
Retailers love new toys to sell, but they can also be a headache, as Costco
Costco limited its return policy recently to 90 days on electronics -- still more liberal than Circuit City
All this is to put Costco's third-quarter earnings release in context. Sales were up 10% but would have been 12% minus the returns reserve adjustment. EPS of $0.49 was flat with last year but, on an adjusted basis, was up 14% to $0.56.
Foolish investors should note two important numbers in the release. Comparable sales were up 7%, another outstanding quarter for the warehouse club leader and much stronger than the Sam's Club division of Wal-Mart
The second important number is membership income, which grew 15% during Q3. Unlike traditional retailers, this is the number I look at most closely for warehouse clubs. About 80% of Costco's operating income derives from the membership fee.
Most of what a warehouse club does is offer outstanding bargains to keep the cardholder base growing. Membership income is also an excellent leading indicator of sales -- more people ponying up for cards today means higher sales to come.
The stock can be somewhat volatile, particularly as Costco management doesn't coddle the analysts. I don't think it really cares what Wall Street thinks -- management is too busy trying to figure out the next super deal to offer its members. The company affirmed its full-year guidance during the call, for whatever that's worth. Returns for investors in Costco have lagged the market for the past year as the P/E multiple contracted. At 24 times trailing-12-month earnings, it's still higher than the market, but you pay for quality. I look to buy the stock on dips.
Costco and Best Buy are Motley Fool Stock Advisor recommendations. Wal-Mart is a Motley Fool Inside Value pick. Both market-beating newsletters are available for a free 30-day trial.
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Motley Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles, and owns shares of Wal-Mart and Costco, but none of the other companies mentioned in this article. The Fool has a disclosure policy.