Costco Wholesale shares slipped lower in early Friday trading but remain on track for a solid monthly gain, after the bulk discount retailer posted impressive quarterly earnings, including surprise gains from big-ticket spending.
Costco (COST) has seen steady market share gains over the post-pandemic years as shoppers seek cheaper grocery and discretionary alternatives amid the long surge in inflation pressures.
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Costco's net sales for the three months ended May 12, the retailer's fiscal third quarter, came in at $57.4 billion. That's a 9.1% increase from the year-earlier period, powered in part by better-than-expected sales for big-ticket discretionary items like electronics and appliances.
Store traffic was up 8.9%, Costco said, well ahead of the gains seen at rivals such as Target (TGT) and Walmart (WMT) , while same-store sales rose by a stronger-than-expected pace of 6.5%.
The group's investment in e-commerce also helped those sales rise 21% on a like-for-like basis, with analysts tying the boost to marketing and delivery improvements.
Costco's bottom line improved 29% to $3.78 a share, well ahead of Wall Street forecasts, while gross-profit margins improved to 10.8% relative to net sales.
"We're all reading a lot about the consumer, of course, and what they're going through right now. And I think what we see is that value and quality has never been more important,' said the retailer's new chief financial officer, Gary Millerchip.
"I think we're drawing customers to what Costco has offered for many years," he added. "And it's never more relevant than now based on what we're hearing from members and consumers."
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Membership fees in focus
The group's much more profitable revenue stream, however, also saw solid gains and made up a good portion of the discussion between Millerchip and Costco analysts following last night's earnings update.
Costco's membership fees, one of the group's most-important profit drivers, generated around $1.23 billion in revenue over the quarter, a 7.6% increase from the year-earlier period.
Around 134 million Costco Club cardholders pay between $60 and $120 a year to shop at the group's 605 North American locations.
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Around half the 74.5 million households that hold cards are Executive members who pay the higher annual cost. This membership includes 2% cash back on in-store and online purchases.
Costco has historically increased that fee every five years, but former CFO Richard Galanti, who stepped down in March, had held it in place since 2017.
Millerchip, a former Kroger executive, seems willing to wait as well.
Membership fees in focus
"We feel really good about membership-renewal rates," he told analysts on a conference call last night. "We feel really good about the test of are we delivering significantly more value to members than we were or have since we last increased the membership fee."
Costco said U.S. and Canada renewal rates were holding at 93%,
"We look at what's happened in the marketplace over the last few years and when we were seeing high inflation and the risk and concern around recession," he added. "We're still evaluating those considerations to determine what the right timing is."
D.A. Davidson analyst Michael Baker, who added $100 to his Costco price target following last night's update, taking it to $780 a share, saw logic in Millerchip's stance.
"Some may be disappointed as yet another quarter passes without a fee increase. But we see management’s point," Baker said "If the model is working so well now, why do it?"
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But while Millerchip might be tempted to raise membership fees, telling analysts "we'll be very open and direct" in communicating any changes, he remained adamant on at least one aspect of Galanti's Costco legacy.
The group's famous hot-dog-and-soda combination has been pegged at $1.50 since 1985, and Galanti told investors in 2022 that it would stay in place "forever."
"Oh, and to clear up some recent media speculation, I also want to confirm the $1.50 hot-dog price is safe," Millerchip said.
Costco shares were marked 2.5% lower in early Friday trading to change hands at $794.71 each, a move that would still leave the stock up more than 22% for the year.
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