It's fair to say that worries over a growth slowdown at Costco (NASDAQ: COST) were overblown. The warehouse retailer last week announced healthy earnings results for its fiscal first quarter that included the start to the critical holiday shopping season.
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And -- except for a stubbornly flat membership renewal rate -- just about all of Costco's key business metrics improved. Let's take a look at a few of the most important ones.
1. 5.9% customer traffic growth
Customer traffic sped up to a 5.9% rate from 4% in the prior quarter, and that increase was the main factor behind a big bounce in comparable-store sales. In fact, Costco's 7.9% comps number put it far ahead of Wal-Mart's (NYSE: WMT) 2.8% and Target's (NYSE: TGT) 1%.
Both rival retailers announced higher customer traffic in their last quarterly reports, but Costco outpaced them by a wide margin. Given that comps were 4% in each of the past two fiscal years, the warehouse giant could be on pace for its first improvement in that metric since 2015.
2. 42% increase in e-commerce sales
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Costco's online sales channel expanded by over 40% to $1.3 billion, or about 4% of the business. That result wasn't as strong as the 50% spike that Wal-Mart recently managed, but it was a good number considering Costco's more modest investment in the segment. Better still, executives explained in the conference call that Costco didn't have to choose between growth in stores or online, as success in one channel supported gains in the other.
3. 17% rise in profits
Net income jumped 17% as gross profit margin held steady and membership fee income rose 10%. That fee number benefited from a rising subscriber base and the higher annual membership rate that started applying to new signups in June. Since that price hike will take about a year to impact existing members as their subscriptions come up for renewal, shareholders can expect it to lift earnings results by an even higher margin over the next few quarters.
4. 246,000 new executive members
Costco's overall membership base ticked up to 91.5 million cardholders from 90.3 million in the prior quarter. It added 246,000 executive members to keep the upgrade pace steady despite higher subscriber fees, too.
These members tend to spend more than Costco's regular shoppers, and so it is good news for the business that conversions are marching higher. Executive members make up 38% of the subscriber base right now, up from 25% a decade ago, and executives hope to push that rate toward 50% over the long term.
5. 90% renewal rate
Costco's renewal rates are down from the record high 91% that the retailer enjoyed in fiscal 2015. Management hasn't been too worried about that decline, though, because they believe it was driven by the credit card switchover that disrupted membership signups last year. Similar shifts, in Canada for example, have caused a renewal rate drop that quickly reversed itself in the following year, executives noted.
That's why it was a slight surprise that the rate didn't budge this quarter but instead held steady at exactly 90%. If renewal rates don't begin recovering in the next quarter or two, then management will have to explain to investors what other issues are at work besides the temporary lull caused by the credit card switchover.
For now, though, many important metrics, including customer traffic, average spending, and new membership signups, demonstrate that subscribers are getting plenty of value from their Costco cards even at the higher annual fee. Those successes build customer loyalty for the retailer, which powers higher sales and profits over time.
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