Costco’s Membership Fees Prop up Net Sales

The Wholesaler’s membership fees grew 6% to $630 million from $593 million

c1Costco Wholesale Corp. (NASDAQ: COST), the second-largest global retailer, announced its Q1 FY17 financial results on December 07th, 2016.

The Issaquah, Washington-based Company, together with its subsidiaries, operates membership warehouses. The company offers branded and private-label products in a range of merchandise categories such as packaged foods, candy, tobacco, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies, appliances, electronics, health and beauty aids. The company also operates gas stations, pharmacies, food courts, optical dispensing centers, photo processing centers, and hearing-aid centers; and engages in the travel business. In addition, it provides gold star (individual) and business membership services. Costco operates under three segments: US, Canada, and Other International. c2Read more about Costco’s financial details below.

Q1 FY17 financial highlights

During Q1 FY17, Costco’s net sales, excluding membership fees, grew 3% to $27.47 billion from $26.63 billion in the year-ago same period, despite headwinds from cheaper fuel, currency fluctuations, and falling grocery prices. Membership fees grew 6% to $630 million from $593 million in the year-ago same period, boosted by membership growth as the retailer opened 10 new warehouses across the US.

The Company also succeeded in pushing the executive membership tier that provides bigger shopping benefits in exchange for a higher yearly charge. That segment now accounts for roughly one-third of the membership base, up from 25% a decade ago, and Costco aims to push that figure up to as high as 50% over time.

During Q1 FY17, Costco’s overall comp sales grew by 1%, but rose 2% excluding negative impact from lower gas prices and the strong dollar. Same-store sales grew 1% in the US, 4% in Canada, and remained flat in the rest of the world. Excluding gasoline sales and currency translation effects, US same-store sales rose 1%, Canadian sales rose 5%, and international sales rose 3% during the reporting quarter.

Despite a slowdown in customer traffic growth, Costco reported positive comp sales growth compared to discount retailer Target Corporation (NYSE: TGT), whose comparable sales declined for the second straight quarter. The Kroger Co. (NYSE: KR), the second-largest food retailer in the US, reported that same store sales grew marginally by 0.1%. Wal-Mart Stores Inc. (NYSE: WMT) was also hit by food deflation and reported a decline in comp sales. Another positive factor for Costco is that the Company has been working to control costs after wage increases and food deflation put more pressure on its bottom-line, which has enabled it to weather challenges better than most rivals.

During Q1 FY17, Costco’s operating expenses jumped as a result of wage increases. Selling, general, and administrative costs jumped to $2.9 billion from $2.8 billion, while merchandise costs grew to $24.28 billion from $23.62 billion. Despite higher expenses, Costco’s operating income rose to $849 million from $767 million in the year-ago same period.

Boosted by lower credit card fees and other terms from its new deal to accept Visa-brand cards, Costco’s profit rose to $545 million, or $1.24 a share, despite higher wages, lower gasoline sales, and deflationary pressure on food items including meat and eggs, compared to $480 million, or $1.09 a share, a year ago. The company also benefited from a non-recurring $51 million ($.07 per diluted share after tax) legal settlement.

Other highlights

Store/warehouse updates: Costco opened 8 locations during the reporting quarter, of which 5 of them were in the US, while the other 3 stores were in Canada.

Costco ended Q1 FY17 with currently operates 723 warehouses, including 506 in the US and Puerto Rico, 94 in Canada, 36 in Mexico, 28 in the United Kingdom, 25 in Japan, 12 in Korea, 12 in Taiwan, 8 in Australia, and 2 in Spain, in addition to its ecommerce websites throughout North America and in the UK, Korea, and Taiwan.

Delivery of fresh foods: Costco has partnered with Instacart, an app-based retail delivery service, for same-day grocery deliveries ordered online. The app that allows customers to select an Order Pickup option for packaged food items or non-perishables. Instacart has also partnered with several other major retailers including Whole Foods Market Inc. (NASDAQ: WFM) and Target Corp. (NYSE: TGT). In recent years, online grocery sales have increased 11% per year on average, compared with just 1.3% at supermarkets, pointing to the fact that retailers have more growth opportunities in online grocery than there is in regular grocery stores.

Guidance for FY17

Costco did not provide any guidance for FY17, but consensus estimates predict EPS of $5.96 on revenues of $128.52 billion.

Stock Performance

c3Costco’s stock stood at $157.59, gaining 2.43%, at the close on Thursday, December 08th, 2016, having vacillated between an intraday high of $160.90 and a low of $156.60 during the session. The stock’s trading volume was at 5,501,359 for the day. The Company’s market cap was at $68.73 billion as of Thursday’s close.

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