Costco Keeps Climbing on Membership Revenue Growth, Earnings Gains

Warehouse specialist Costco Wholesale (NASDAQ: COST) has been a giant in the retail world, mastering its own niche and finding ways to profit that competitors have found difficult to match. However, even Costco has had challenges to overcome recently, and coming into its fiscal first-quarter financial report on Wednesday night, Costco investors were hoping that the company would be able to keep producing modest single-digit percentage gains in sales and earnings. The company succeeded on both fronts, and even though it took a one-time legal settlement to juice its earnings, Costco shareholders nevertheless seemed pleased with its prospects.

Let's take a closer look at Costco Wholesale and whether it can build up more positive momentum in the future.

Image source: Costco.

Costco stays the course

Costco's fiscal first-quarter report was generally consistent with what most investors had expected to see. Revenue was up 3.2% to $27.47 billion, which was only a little slower than the 4% consensus forecast for top-line growth. On the bottom line, net income of $545 million was higher by nearly 14% from year-ago figures, and produced earnings of $1.24 per share. Yet even though that figure was $0.05 per share higher than investors were expecting, Costco's results included a $0.07 per share benefit from a legal settlement. Without that adjustment, earnings would have fallen short of investor expectations.

Taking a closer look at Costco's numbers, the good news for those who follow the retailer's stock quarter after quarter is that comparable-store sales trends appear to be becoming more favorable. Overall comps grew 1%, with 4% growth in Canada overcoming flat performance in its other international category, and U.S. comps were also up by 1%. When you take out the impact of gasoline prices and foreign currency adjustments, the U.S. still saw a 1% rise, gains of 5% in Canada and 3% in the rest of the world led to an overall 2% gain for the company as a whole.

One key aspect of Costco's long-term success has been its ability to keep its membership fee revenue rising. This is important because unlike its merchandise sales, on which the company tries to maximize revenue even at the potential expense of margin levels, membership fees represent almost pure profit. During the quarter, fee revenue climbed 6% to $630 million, keeping up its recent pace and helping to offset a nearly 5% jump in overhead expenses.

Can Costco climb faster?

A return to comparable-store sales growth is great news for Costco, but that doesn't mean that the retailer doesn't remain committed to expanding its network to drive revenue gains as well. The company saw eight new locations open during the quarter. Five of them were in the U.S., while the other three stores brought its total in Canada up to 94. Overall, Costco now has a network of 723 warehouses in nine different countries, in addition to its e-commerce websites throughout North America and in the U.K., Korea, and Taiwan.

A couple of factors showed promise for Costco's future. First, better margin levels on fresh food items such as produce and prepared foods played a key role in supporting Costco's profitability. At the same time, declines in the amount of card-related expenses it pays to Visa (NYSE: V) helped reduce Costco's overall cost structure. It also provided further validation for Costco's decision to leave its branded-card relationship with American Express (NYSE: AXP).

Some investors might have been disappointed with the company's lackluster bottom-line growth, but Costco shareholders nevertheless sent the stock up nearly 2% in after-hours trading following the announcement. If Costco can keep executing on its successful business model, then it appears to have the resiliency necessary to hold off competitors in the e-commerce world and keep generating impressive profits well into the future.

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Dan Caplinger has no position in any stocks mentioned. 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.