4 Things Costco's Management Wants You to Know

By Markets Fool.com

Costco (NASDAQ: COST) has continued to defy the odds.

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The company has managed to buck current retail trends by maintaining sales and keeping its membership base growing despite the growth of the internet. In a day and age where more people choose to shop online, Costco has continued to get people to visit its stores.

In addition the chain has successfully navigated a very difficult switch from its longtime rewards credit card provider to a new partner. That move from American Expressto Visa had huge potential for problems. It not only meant getting cardholders to activate and use the new card, but also dealing with no longer accepting any American Express cards at its stores.

It was a big change that had the potential to cause huge problems for the company, but despite a bumpy road, Costco came out the other side quite well. CFO Richard Galanti shared the warehouse club's Q4 and full-year results in a conference call on Sept. 29. He was notably happy about the results while also being optimistic about what's coming next.

Costco has kept its sales high despite increased online competition. Image source: author.

Earnings are good, gas is a drag

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Galanti reported during the earnings callthat Q4 earnings were solid. For the quarter, the warehouse club posted earnings of $1.77 a share, up $0.04 or 2% over the same period in 2015. The number was hurt by foreign currency exchange and gas prices.

"Our profits from gasoline during the quarter as compared to last year's fourth quarter were lower by about $27 million pre-tax or $0.04 a share, primarily a function of last year's very strong profit results in the fourth quarter," he said. Gas prices being lower also hurt comparable-stores sales which were flat year over year.

Membership fees were strong

The CFO noted that membership fees were a source of growth. The company reported $832 million in revenue from memberships, up $47 million or 6% from the previous year. Galanti credited strong renewal rates with driving those numbers.

We continue to enjoy strong renewal rates, 90% in the U.S. and Canada and 88% worldwide, continuing increasing penetration of executive memberships as well. In terms of number of members at fourth quarter and year end, at year end, we had 36.8 million Gold Star members, up from 36.2 million 16 weeks earlier at the end of the third quarter. Primary Business ticked up to 7.3 million from 7.2 million. Business add-on remained at 3.5 million for a total of 47.6 million member households at Q4 end compared to 16 weeks earlier when it was 46.9 million.

The company has lowered its inventory

One challenge facing any retailer is to have enough product on hand without paying for more than it needs. Costco has been engaged in a two-year effort to update its basic accounting platform and one benefit of that has been added inventory efficiency.

"In terms of average inventory per warehouse, last year fourth quarter end, it stood at exactly $13 million per warehouse," Galanti said. "This year, it came in at just slightly over $12.5 million or about $460,000 lower or 3% lower."

The CFO noted that the decrease was spread across many categories. A piece of the reduction also came from deflation in "many of the food and fresh departments as well as electronics," he said. "A little bit of it has to do with FX, but most of it is just coming down a little bit on inventory levels."

More U.S. expansion is possible

Galanti told people during the call that while he once thought the company would soon reach a saturation point in the U.S., he no longer believes that to be true. He explained that the company used to avoid medium-sized markets where its direct competitors already operated, but that's no longer the case.

Now some of these markets are smaller, it takes a little longer, but there is clearly an opportunity for us there. We have gone into Tulsa and New Orleans and Birmingham and Rochester and lots of -- and Toledo, these are markets that again, were higher on the radar 7 years or 8 years ago. And what we have seen is that our deal works.

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Daniel Kline has no position in any stocks mentioned. He often buys his son a churro at Costco and nothing else. 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.