Costco mulls change after earnings that would please investors

Saturday, 14 December 2024

Costco mulls change after earnings that would please investors

by BD Banks

When consumers are sharply focused on budgeting, many of them look to discounters like Costco.

They’re not deterred by the membership fees that the warehouse club charges because they figure that access to the group’s sharp discounts are worth the up-front cost.

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For the recently completed fiscal third quarter the company reported $1.7 billion in revenue from membership fees, accounting for nearly two-thirds (64.8%) of net income.

However, only a small part of the total reflected the fee increases the company instituted in September—$5 to $65 for regular memberships and $10 to $130 for executive memberships.

The total impact of the increase will not be known until at least the fall of 2025 because the fee is paid only when customers take out memberships or renew current memberships. The fee is amortized over the next 12 months.

The company says the fees enable it to keep prices lower, give employees raises, and the like.

And loyalty is key: Costco members like being members, fee increase or not. About 93% of U.S. customers renewed their memberships in the past 12 months. The worldwide membership renewal rate was 90.4%.

Customers shop for clothing at a Costco store in Novato, Calif., on Dec. 11, 2024.

Justin Sullivan/Getty Images

About 77.4 million customers have regular memberships; the executive members total 36.4 million. And that latter group is responsible for 73% of sales. They are eclectic shoppers, buying clothes, produce, meat, travel packages and even gold.

One can join Costco electronically now, and Chief Financial Officer Gary Millerchip said most consumers online buy the regular membership.

But when they buy memberships in a Costco store, they are more likely to buy the executive memberships, which offers a suite of benefits and discounts, including cash back at the end of the year.

Costco beat analyst estimates in fiscal Q3

Costco Wholesale COST easily beat analyst estimates for its fiscal- third-quarter earnings, boosted as always by the membership fees.

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Digital sales and customer loyalty helped sales, as did careful attention to how it buys and and prices what it sells, Costco said.

In the quarter the company earned $4.04 a share, up 12.8% from a year earlier. The consensus earnings estimate was $3.79.

Revenue, up 5.8% from the year-earlier period to $61.2 billion, lagged the consensus estimate of $62.1 billion.

The company did not offer guidance for the fiscal fourth quarter, which ends in January. But it is the company’s biggest quarter, and CFO Millerchip said during the earnings call that holiday sales so far have been strong.

Net sales were up 7.5% to $60.1 billion from the year-earlier period’s $56.7 billion. Comparable sales — sales at stores open at least a year — were up 5.2%. Adjusted for changes in fuel prices and foreign exchange, the number was 7.1%.

E-commerce sales were up 13.2% from a year earlier. The company did not offer a dollar amount.

Costco finished the quarter with 897 warehouses, including 617 in the U.S. and Puerto Rico. Costco also has stores in Canada, Mexico, Japan, the UK, South Korea, Australia, Taiwan, Spain, France, Iceland, New Zealand and Sweden.

Costco shares at last check were up 1.35% at $1,001. The shares are up by about half in 2024.

Shares of rival Walmart (WMT) , which owns the competing Sam’s Club membership chain, were up 0.3% above $94 in Friday trade. But the shares are up nearly 79% this year.

Target (TGT) shares on Friday were off 0.2% near $135. They’re down 5% this year.

Costco may consider a stock split

Costco has often been touted as a potential member of the Dow Jones Industrial Average but would not be considered unless it declared a stock split.

The Dow is a price-weighted index. That means the higher the stock price, the more influence it has on the average.

Costco’s stock price, now exceeding $1,000, would swamp the average. The most expensive Dow stock currently is Goldman Sachs (GS) , which is currently trading around $587.

More Wall Street Analysts:

Splitting Costco shares would make them more attractive to small investors as well as to Costco employees, many of whom are avid buyers of company shares, analyst Karen Short of Milius suggests.

Short has a hold rating on the stock with a $950 price target.

Costco CFO Millerchip said small investors and company employees can buy fractions of shares. But he and Chief Executive Ron Vachris said they might give the idea more thought.