Costco (COST, Financial) reported that its January sales increased by 9% to reach $9.08 billion compared to last year’s $8.32 billion. Comparable sales were strong across all regions led by Canada with a 11% increase, followed by the U.S. with 6%. Since these two regions are the most important ones for the company, the increase in comps is great news.
The holiday season seems to have put the smile back on Costco management’s faces, as comparable store sales in the U.S. increased 1% in November, 3% in December and 6% in January. The wholesaler has picked itself up quite a bit in the last few months, and seems to have put last year’s performance behind it.
Comparable store sales have been contracting in U.S. since 2016, and a sustained move to lower levels could have easily become an irreversible phenomenon. The retail market in the U.S. has been disrupted in a big way due to e-commerce, and only those companies that have a unique value proposition will be able to survive that disruption. Costco does not have a proper e-commerce game and it may remain that way for a long time, but the recent quarter’s results shows its resilience in the face of the e-commerce onslaught.
“Chief financial officer Richard Galanti told analysts on Costco’s Q3 2016 earnings call that online sales grew 19% year over year during the quarter. Costco, No. 8 in the Internet Retailer 2016 Top 500 Guide, does not break out online sales in its quarterly earnings report, and Galanti did not provide a dollar figure. Costco’s 2015 web sales were $4.472 billion, up 19.6% from $3.738 billion in 2014, according to Top500Guide.com data.” - InternetRetailer
Costco still relies on its membership base to keep its sales ticking up, and the model has worked very well for the company. The above-90% membership renewal rate is a clear indication that its members see it as a value-for-money destination that keeps them coming back for more. The fact that renewal rates have remained high while ecommerce has been growing at a rapid pace shows the kind of moat that Costco has built using its membership-based business model. This is also something that is working extremely well for Amazon (AMZN, Financial), I might add.
Looking at the last three months’ comparable store sales data, Costco seems to have turned things around in the U.S. If the company can sustain it, then net sales will start moving up again. It’s a difficult market, considering the competition and e-commerce, but Costco might be the one company that can stand tall against Walmart (WMT, Financial) and Amazon.
Disclosure: I have no positions in the stocks mentioned above and no intention to initiate a position in the next 72 hours.
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