Costco (COST, Financial)'s first quarter results confirmed the resilience of the retail warehouse major even as competition between physical and virtual retailers heats up with each passing quarter. Net sales for the quarter increased 3%, from $26.63 billion last year to $27.47 billion this year, as comparable sales for the quarter increased by 1%, and 2% when excluding the impact of changes in gasoline prices and foreign exchange.
The best part about the 3% growth was that same store sales came in positive across all segments, with U.S. and Canada reporting 1% and 3% growth and international stores reporting 4% growth.
Membership growth remained steady during the quarter, which should give the company a lot of confidence moving forward.
“At November 20 first quarter end, Executive Members stood at 17.7 million member households, an increase of 348,000 since the end of the previous quarter. That's about 29,000 additional Executive Members per week increased during the 12-week quarter,” said Richard Galanti, Costco CFO, during the Q1-17 earnings call.
Renewal rate - the number of Costco members who chose to renew their membership - remained as high as ever, with U.S. reporting 90%, Canada 90.3% and worldwide 88%. At the end of first quarter, Costco had 87.3 million people with a membership card compared to 86.7 million by the end of fourth quarter of last fiscal.
The fact that memberships are growing while renewals hold steady is, once again, a validation of Costco’s business model. Despite the competition in the retail industry, the growth and the consistent renewal rates make it clear that consumers continue to prefer Costco and their differentiated concept.
The underlying strength of its membership-based business model is keeping the company at the top of its niche, while other retailers struggle to keep their top lines moving up against the onslaught of e-commerce and current deflationary market conditions.
The growth of Amazon’s U.S. retail numbers is not because the company is creating new customers or new markets. It is the direct result of Amazon “stealing” customers from traditional brick and mortar stores of all types. Not many retailers are able to protect their customer base and consistently keep adding to its fold the way Costco can.
Rather than showing signs of erosion from the growth of e-commerce, this key metric has been showing strong and consistent upward movement. That can only mean they continue to see value in the brand despite the wide range of online options to choose from. And the ultimate litmus test result of that is that this quarter was no different. Membership revenue reached $630 million, an increase of $37 million over last year’s $593 million.
The only grouse I continue to have with Costco is its slow uptake of e-commerce to complement foot traffic. The company is likely wary of disturbing a model that works in favor of trying something new and failing at it. But my take is that Costco isn’t interested in taking the online route in a big way. At the very least, that differentiates it from just about every major physical retailer, which makes Costco an even more attractive buy.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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