Costco Wholesale Corporation (NASDAQ:COST) at least partially redeemed the reeling retailing industry on Friday. With the echoes of disappointing first-quarter earnings reports from Lowe’s Companies, Inc. (NYSE:LOW), Chico’s FAS, Inc. (NYSE:CHS) and Tiffany & Co. (NYSE:TIF) still ringing, Costco stock managed to put up a healthy gain on the back of Thursday evening’s release of its fiscal third-quarter numbers.
Not only did earnings roll in better than expected, same-store sales grew at an almost-heroic pace.
How was Costco able to do what so many of its peers haven’t been able to do? And, perhaps more important to current and would-be owners of COST stock, can the retailer continue its fruitful growth?
The answer to the first question is, it just strikes the right cord with consumers … one of the few retailers to find a balance between value, customer-experience and convenience.
As for the second question, yes, Costco stock can remain protected by its surprisingly wide moat.
Costco’s Q3 Earnings
For the quarter ending in early May, Costco earned $1.59 per share — or $1.40 per share on an operating basis — on revenue of $28.22 billion. While the top line missed expectations of $28.6 billion, it was still up 8% on a year-over-year basis. Profits rolled in better than the year-ago bottom line of $1.24 per share of COST, and handily beat analyst estimates of $1.30 per share.
Most impressive of all, though, was the 5% increase in same-store sales versus estimates of only 3.7% growth.
It’s a ray of hope from an otherwise-gloomy retail environment, with rival Wal-Mart Stores Inc (NYSE:WMT) being one of the few exceptions. Last quarter, Walmart topped its earnings estimates, and even mustered much-needed same store sales growth of 1.4%.
Still, Costco’s results were decidedly better than its peers. What gives?
The Same, But Different
At first glance, Costco stock more or less looks like Walmart or Target Corporation (NYSE:TGT) in that all three sell basic goods and staples. Yes, Costco charges an annual membership fee, but it’s widely understand as the way it can (though not that it always does) offer lower prices.
What’s noteworthy about Costco, however, is how much of its profits — not revenue, but profits — stems from those membership fees. Last year, they accounted for 72% of the company’s bottom line, and that’s not apt to change in the foreseeable future considering more than 90% of its members renewed their membership last quarter.
In that light, Costco isn’t a retailer in the business of selling merchandise. It’s in the subscription business, selling access lower-cost shopping choices.
Consumers are savvy, nevertheless. If what was happening in its stores paled in comparison to the customer experience delivered by Target and Walmart, Costco couldn’t remain in the subscription business very long.
In that regard, Costco still does retailing right.
CNBC’s Fast Money panelist David Seaburg arguably assessed it best following Thursday evening’s report, explaining “I think it’s a little of the experience as well. This is a name where you walk into a Costco, you’re walking out with stuff you couldn’t even imagine you were going to walk in and buy … and lots of it.
Co-panelist Brian Kelly also has a bead on the company’s success, pointing out why it manages to remain competitive with Walmart and Target when it comes to groceries even though it charges a fee, “Costco’s been in it longer than (Walmart and Target have). Costco has the lock on it, and that’s why you buy a membership.
Looking Ahead for Costco Stock
None of this is to suggest COST is immune to a retail headwind. It isn’t. On the other hand, last quarter’s results make it clear it’s appealing to consumers better than most other retailers are.
Part of that strength has to be attributable to a general shift in consumer mindsets. Less important are brand names (particularly in clothing), and more important is value and convenience. Costco delivers both of the latter.
Still, to the extent the basic customer experience plays a role in retailing success, Costco continues to deliver one that’s better than most of the rest.
The toughest part about buying into Costco stock now is its frothy trailing price-to-earnings ratio of 32. Sometimes though, you have to pay for quality.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.