Costco Wholesale (COST +0.45%) reported earnings for the 12 weeks ending Nov. 25, exceeding last year's performance on nearly every measure. The company announced strong growth in same-store sales while also expressing optimism over the number of new store openings in 2013. This positive news came on the same day that Wal-Mart (WMT +0.58%) CEO Mike Duke warned that a weak economy and concerns over the fiscal cliff could derail his own company's performance. That Costco faces the same concerns and yet continues to grow and beat expectations speaks to the resilience of the company's model in any business climate.
Earnings per share for the quarter came in at $0.95, slightly surpassing Wall Street expectations of $0.93 and a solid 30% higher than last year's first quarter, when the company brought in $0.73. Adjusting for two onetime charges that depressed earnings last year, the settlement of an income tax audit in Mexico, and a political contribution to a campaign to liberalize liquor sales in Washington state, the earnings beat was "only" 20%.
Costco's net revenue also grew by 10% in the first quarter, boosted by nine new store openings in the U.S. and Canada and same-store sales growth of 7%. Excluding the effects of gasoline price fluctuations and foreign currency movements, same-store growth was 6%. This was driven by moderately higher average receipts, up 2.5%, and an increase in visiting frequency of 5%. This means existing members are shopping at Costco more often and spending more when they go. Given that this was a quarter in which many consumers faced economic uncertainty over the fiscal cliff, and Costco stores in the Northeast were negatively affected by Superstorm Sandy, this is a good sign that Costco members appreciate the company's value proposition in any economy.
In Costco's case, however, sales growth doesn't automatically translate to bottom-line growth, due to the company's policy of selling goods at as low a margin as possible. Instead, Costco sees sales increases as evidence that its members, who pay an annual fee to shop at Costco, are getting more and more value from their membership. Accordingly, in the first quarter, Costco's membership fee revenue grew by 14%. At $511 million, Costco member fees provided all of the company's $416 million in net income and then some. Membership grew 2.2% in the period, from 26.7 million to 27.3 million.
Despite all this good news, the share price hasn't budged much. There are two reasons for that, the most obvious being the company's recently announced special dividend of $7 per share. Shares jumped when management announced the special payment on Nov. 28. The special dividend will be paid on Dec.18 to investors who owned shares as of Dec. 10, and the stock has slipped since the 10th as investors who piled in for the special dividend exit the company. That effect has probably overwhelmed the good earnings release.
The second reason for a relatively tepid market reaction is simply that many investors already expect Costco to consistently execute at a high level. The company has put in an incredible performance over the past decade, and this quarter was simply nothing different. In that sense, not much has changed over at Costco, where outperformance is the norm.
