Classic brick and mortar retailers continue to suffer at the hand of online and e-commerce firms. Consumers continue to go online in a major way. Warehouse club and bulk retailer Costco Wholesale Corporation (NASDAQ:COST) was always thought of as an “e-commerce proof” retailer by analysts and for the most part, it is. However, even mighty COST has had to deal with rising threats from e-commerce.
This latest quarter told a mixed story for Costco stock when looking at its sales and overall profits.
But one the key drivers of the COST thesis is still going strong. And that’s memberships.
Memberships continue to be a major predictor of future earnings growth for Costco stock and this quarter, those memberships continued to rise.
For COST stock investors, it’s the one major bullish sign when it comes to the company’s future and dealing with the threat of online shopping.
COST Headline Numbers Are Just Ok
Looking at the headline numbers, Costco stock had a “bad” quarter. Both profits and sales missed expectations and came in shy of the $1.19 per share in profits and $28.4 billion in sales that analysts wanted for COST stock. This is now the latest in a series of quarterly misses from the retailer. However, what it did manage to do was increase profits by 1% and sales by 3.2% versus last year at this time. In the end, that’s really more important.
Costco’s members are what is really important to the company and they are also its only hope of defeating the likes of Amazon.com, Inc. (NASDAQ:AMZN) and its online brethren.
Because COST doesn’t just let any Tom, Dick and Harry use its 700-plus stores, its members are the lifeblood of the firm. In more ways than one.
Unlike selling 55-gallon drums of olive oil or 32 packs of Hot Pockets, revenues derived from membership fees are pure-profit. It doesn’t really need to think about margins when selling someone a yearly subscription to shop at its stores. It literally takes an employee about 30 seconds to sign someone up and there is no overhead in doing it. Just a plastic card and few minutes of labor cost.
Over its long history, the lucrative membership fees have provided COST stock will a steady stream of profits to help it thrive in good times and in bad. The fees are really the reason why Costco has been able to operate profitably at significantly lower gross margins than traditional retailers and supermarkets. It really can under-cut on price because it has a steady dose of fee revenue coming in. Last year, those fees totaled roughly $2.5 billion in revenue. That covers a lot of low-margin fruit sales.
There’s another reason why Costco stock and its investors should love its members. They are increasing more affluent than other retailer’s core demographics. The average COST member is college educated, owns a home and earns about $100,000 a year. This makes them a prime target for shopping. The average Costco member doesn’t need to think about choosing between buying bread or a frivolous one-time only special.
While general margins for COST sold items remains low, its 87 million members continue to buy more and more things — as evident from the 3.2% increase in overall sales this quarter.
COST Stock Can Fight Online Retailers
So membership growth and sales are extremely important to Costco stock’s overall health. But it’s becoming more important to its future health as well.
The name of the game at Amazon is low price. That’s what the firm thrives on — finding you the deal or at least the perception of the best deal. Some retailers like Macy’s Inc (NYSE:M) simply can’t compete on price, while others like Wal-Mart Stores, Inc. (NYSE:WMT) have a consumer base that is so price sensitive that they’ll jump ship for a few cents in savings.
COST avoids this problem.
Membership fees can be raised slightly each year and form a base of sales that enable it to cut further on product price and keep people shopping. It can literally take on AMZN in a price war. Not a lot of retailers can say that or can even have the gumption to try. But because it has a steady source of free money, Costco can. And given its over 90% renewal rate and rising Executive-level membership growth, it will succeed in the new retail paradigm.
Bottom Line for Costco Stock
Sure, COST stock missed estimates. But it managed to grow on the one metric that really matters: memberships. The continued growth in both fees and number of members will enable the firm to prosper in the new age of retail. It’s what investors should be focusing on and so far, Costco stock continues to deliver for shareholders.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
