If you think all bricks-and-mortar retailers are struggling nowadays, you probably haven't been to your local Costco (COST +0.89%) lately.
To be sure, Costco just told investors fiscal fourth-quarter net revenue jumped 9% year over year to $34.8 billion, helped by a solid 6% jump in comparable-store sales. Curiously, however, that revenue number actually fell slightly short of analysts' models, which called for sales of $35.23 billion. So, why did the market reward Costco shareholders with a more than 3% pop Thursday?
In short, Costco's performance was capped by a 10% jump in net sales in the month of August, during which Costco enjoyed solid companywide comparable sales growth of 7%. Excluding the negative impact of lower gasoline prices and foreign exchange rates, Costco's August comps would have increased 8%. Either way, this marks Costco's strongest same-store sales performance since Dec. 2012, and it easily trumped analysts' expectations for growth of 4.8%.
Bricks-and-mortar can survive and thrive
What does this say about the retail industry as a whole?
Most importantly, it reaffirms the notion that -- given the right business model -- bricks-and-mortar retailers can succeed without a significant online presence. Last fiscal year, for example, Costco's online business only operated websites in the U.S., Canada, and the U.K., and collectively represented just 3% of total net sales. Costco has since launched a website for Mexico, but even then, e-commerce shouldn't be expected to significantly affect its overall results just yet.
And that's not terribly surprising, especially considering analysts at A.T. Kearney recently estimated 90% of all retail sales are still transacted in stores. What's more, they say a full 95% of all retail sales in the U.S. last year were captured by companies that also have a physical store presence.
Of course, that doesn't mean up-and-coming e-commerce competitors like Amazon.com (AMZN +1.11%) aren't still a threat. Amazon, for its part, used its razor-thin margins to grow net product sales by an incredible 19.6%, to $15.3 billion, during its most recent quarter. What's more, e-commerce on the whole has steadily gained ground over the past decade as a percentage of overall retail sales in the U.S.:
US E-Commerce Sales as Percent of Retail Sales data by YCharts.
It seems reasonable, then, to expect the steady trend to continue going forward -- though it's worth keeping in mind a significant chunk of those e-commerce sales are likely to continue coming from traditional retailers like Costco as they steadily grow their own online operations.
Direct competitors aren't keeping up
Even more impressive, it's not as though Costco's discount retail competitors are following suit. Take its primary publicly traded opponent in Wal-Mart's (WMT +1.92%) Sam's Club, for example, which only grew net sales by 2.3% to $14.9 billion last quarter on flat comparable-store sales. For the current quarter, Wal-Mart only expects Sam's Club comps (excluding fuel) to be "slightly positive."
To its credit, Sam's Club did achieve 11.9% membership income growth over the same period, which is evidence of its efforts to inspire greater customer loyalty by increasing the value of membership through lower prices and cash back programs.
But keep in mind at 90.6% last quarter, Costco's membership renewal rate is still nothing to scoff at. In any case, it's evident Costco has found a more effective balance in managing its business for overall growth through a combination of new units, efficient inventory, and price management, and its general practice of catering to more affluent consumers.
In the end, Costco's history of outperformance gives investors every reason to believe its unique wholesale membership business model should allow it to continue thriving for the foreseeable future.
