Costco Wholesale Corporation's Best Business Segment in 2016 So Far

By Markets Fool.com

Costco has continued to hold onto and grow its membership base. Image source: Author.

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For Costco (NASDAQ: COST), it's not really about how much the chain sells.

The merchandise in its warehouses, whether it be food, clothes, or any of the other categories it stocks, really serves only to entice people to join. Analysts and the media love to focus on minute changes in the chain's sales figures each month, and those numbers are relevant, but only to a point. The warehouse club generates about 75% of its profit from memberships, which means sales are only important insofar as they drive membership sales. In theory, people go to Costco because of the stuff on the shelves, the low-priced gas, and other perks the chain offers.

When it comes right down to it, though, the warehouse club exists to sell memberships. The company's new signup and retention numbers matter much more than whether it sells more coffee pods, bulk mayonnaise, or giant stuffed teddy bears in any given quarter.

Costco's sales may be sputtering a bit, but its best business segment so far this year has been the one that matters most: membership sales.

How do membership numbers look?

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Despite the short-term trauma caused by Costco changing its loyalty rewards credit card from American Express (NYSE: AXP) to Visa (NYSE: V), the warehouse club has still managed to maintain its renewal rate and continues to sign up new members.

"In terms of renewal rates, we continue at strong renewal rates, 90% plus in the U.S. and Canada, 88% worldwide," said CEO Richard Galanti during the chain's Q3 earning call, according to aReuterstranscript.

The CEO noted that year-over-year signups were up at 15% for the U.S. and the rest of the world, driven by strong numbers at new stores in Taiwan and Japan:

In terms of number of members at third quarter-end, Gold Star was 36.2 million, up from 12 weeks earlier at 35.4 million; primary business, the same at 7.2 million; business add-ons, the same 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.

Total membership now stands at 85.5 million, up 1.5 million from 84 million at the end of the second quarter. Galanti added:

In terms of renewal rates, business members were 94.4% at the end of the quarter, tweaked down from 94.5%; Gold Star, 89.6%, a tenth down also, [from] 89.7%; and so total U.S. and Canada, 90.4%, down from 90.5%, worldwide, at 87.6% at the end of the quarter, again a tenth down as well.

These are strong results

Being down only slightly during a period when the U.S. credit card switch could have been a major negative pull on retention is a strong positive. It's not simply that the rewards card moved from American Express to Visa, but that the chain stopped taking American Express altogether. That could have seen members leave for rival warehouse clubs since American Express has a strong base of business customers.

That has not happened. Perhaps business users found alternate means of paying, or maybe they were willing to switch to the new Visa card. No matter the reason, Costco has maintained its membership base, and that's the most important factor driving its business.

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Daniel Kline has no position in any stocks mentioned. He has a Costco membership he rarely uses and may not renew. The Motley Fool owns shares of and recommends Costco Wholesale and Visa. 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.