2 Key Metrics for Costco Investors to Focus On

By Markets Fool.com

While traditional retail stores worry about comparable-store sales, Costco's(NASDAQ: COST) business lives or dies based on other metrics.

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Sales are certainly important, but membership fees account for about 75% of the chain's operating profits. That makes new memberships and member churn the most important metrics for a company built around signing people up and holding onto them.

Costco has generally done very well in this regard, with its membership steadily growing and its churn rate staying shockingly low. Those numbers drive the business. Membership fees essentially are pure profit margin, and renewals are profit that has no marketing costs.

Memberships are the key revenue driver for Costco. Image source: The Motley Fool.

How do the numbers look?

During the company's Q3 earnings call,CEO Richard Galanti shared some good news on memberships.

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"Membership fees came in -- in dollars were up 6% and up seven basis points as a percent of sales, coming in up $34 million from $584 million last year to $618 million," he said, noting that without currency deviations, the improvement would have actually been 7%.

He also said renewal rates were over 90% in the United States and Canada and came in at 88% worldwide. Those actual numbers broke down in Q3 to business members renewing at a 94.4% rate, down from 94.5%, the same drop Gold Star had to come in at 89.6%. That left the total U.S. and Canada number at 90.4%, down from 90.5%, while global renewals also dropped by one-tenth of a percent to 87.6% at the end of Q3.

Galanti blamed the drop on the fact that new sign-ups for Costco's branded credit card had been frozen in the U.S. for the quarter while the company completed shifting providers.

Still, however you look at it, while you don't want to see a drop in any key metric, the overall subscription revenues and renewals were very strong in Q3.

What about new members?

"New member signups in the quarter companywide were at 15% year-over-year in part driven by strong sign-ups at our new openings in Taiwan and Japan," Galanti said. "The Asia openings always have outsized new sign-ups. We also had very strong sign-ups in Tulsa, for that matter. Overall, in the U.S., in fact, it was up 15% as well."

In the quarter, the company grew its Gold Star memberships (the basic $55 per year tier) from 35.4 million at the close of Q2 to 36.2 million at the end of Q3. Business memberships were flat at 7.2 million year over year, while the same was true for business add-ons, which came in at 3.5 million at the beginning and the end of the quarter.

"So all told, 46.9 million member households, up 800,000 from 46.1 million at Q2 end," the CEO said.

Costco has been steady

For Costco, Q3 may be the calm before the storm. In Q4, it executed its credit card switch from longtime partner American Expressto Visa. That change, which took place in June, was a bit of a rough transition partly because of the large number of people involved.

A bigger problem -- and this is not exactly related to how the switch was handled -- is that the chain now only takes Visa. It does not take American Express at all, which could force some business customers to consider other warehouse chains.

That's a wild card that could impact Q4, but aside from that, and the small turbulence caused by the credit card switch in general, Costco has been steady with these two key metrics. It should continue to be steady going forward aside from a possible small loss of American Express loyalists, and maybe an even smaller group of people who simply do not like change.

Still, since Costco is not likely to change credit card providers again any time soon, even a slight downturn in Q4 is no cause for alarm. The warehouse club has steadily posted good numbers, and there's every reason to believe that any deviations in these metrics will be minor.

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Daniel Kline has no position in any stocks mentioned. He is the perfect Costco member as he pays, but very rarely shops a the chain. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.