It is laughably easy to cancel your Costco (NASDAQ: COST) membership. All an unhappy shopper has to do is tell the retailer that they aren't satisfied with their subscription, and Costco will refund all -- not just a prorated amount -- of the fee and send you on your way. What's more, the company gave its entire shopper base a good reason to consider parting ways when it raised its membership fees on both the gold star and executive subscription levels.
And yet, Costco recently announced that its renewal rate ticked up to 90.5% in the fiscal first quarter, meaning that, after hovering around 90% over the last three years, the metric is close to the record set back in 2015.
Let's look at why the retailer is winning so much repeat business these days.
More cash in shoppers' pockets
Part of the answer is an improving economy that has put extra cash in consumers' pockets. After all, Costco isn't alone in posting head-turning results lately. Rival Walmart (NYSE: WMT) lifted its 2018 outlook in each of the last two quarters, and Target (NYSE: TGT) recently revealed some of its strongest customer traffic in more than a decade. For obvious reasons, it's easier to convince customers to extend their subscription commitment during boom times like these.
Still, Costco is outpacing these peers, having expanded sales in the U.S. at an 8% rate in the latest quarter, compared to Walmart's 3% increase and Target's 5% bump. The warehouse giant is pairing its historically strong customer traffic with an expanding store base and higher spending per visit. Put all of those positive trends together, and you have a formula for market share growth and big revenue gains.
Credit card success
Costco shareholders can also thank its co-branded credit card for helping the rebound. Renewal rates dropped following the switchover, leading many investors to worry that the chain was losing some of its retailing mojo either to traditional competitors like Walmart or to e-commerce specialists. Costco's management team wasn't worried, though, predicting in late 2017 that the drop would reverse itself after the credit card shift worked its way through the membership base. Chalk one up for Costco executives, here.
Warehouse shoppers have enthusiastically taken up the new Visa-branded card, and in fact, the company had to take a charge last quarter to account for the fact that reward benefits are being redeemed faster than they had predicted. Costco is thrilled with that result, since it means customers are shopping more and getting plenty of value out of their rebate cards.
Then there's Costco's price leadership positioning, which is looking more attractive as prices climb on staples like groceries and apparel. Even in an inflationary environment like that, the company can afford to reduce the prices it charges on most of these products thanks to its low-cost selling approach, its annual sales base of over $140 billion, and membership fees that now amount to over $3 billion a year.
That operating setup doesn't always deliver robust profitability. Earnings disappointed some investors at the start of Costco's fiscal 2019, for example. However, the retailer's executives have argued that this approach tends to support market-share growth, mainly by delivering improving customer loyalty that translates into higher revenue and stronger profits over time. Costco's renewal rate is the best approximation we have for that shopper loyalty, and it's describing a business that's having no trouble resonating with customers.
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