Costco Wholesale Corp. (COST, Financial) has seen an impressive run recently, rising more than 15% in the past two months. Shares of Costco escalated to its new all-time high after reporting strong first-quarter results on Dec. 14.
For the first quarter, the retailer reported earnings per share of $1.45 and revenue of $31.8 billion. Both the figures exceeded analyst expectations. Bottom line beat by 11 cents, while top-line beat $310 million.
The retailer’s comparable-store sales (comps) surged more than 10% year over year, significantly higher than its peers. Its customer traffic growth increased to 5.9%, and that surge was the primary reason behind a huge jump in comparable sales.
On the other hand, its e-commerce sales increased 42% to $1.3 billion. Online sales currently account for less than 5% of its overall revenues, suggesting that the retailer has plenty of room to grow its online sales in the future. Although Costco joined the race comparatively late, it is now aggressively focusing on expanding its online business.
The retailer’s new delivery options comprise of both two-day delivery service as well as same-day delivery service on selected products. The company is expecting to escalate its capital expenditures in 2018 considering its new openings, manufacturing and upgrading of its website.
The retailer believes that an attractive and efficient website will positively impact its in-store sales and is focusing on enhancing the functionality of its website.
In fact, the retailer currently generates more than 75% of its overall profits from selling memberships, suggesting that renewal rate is one of the most significant metrics to watch in the case of Costco. It is essential for shareholders to continuously monitor its membership count, as a declining membership base will certainly lead to deteriorating net income.
In the prior quarter, the retailer’s renewal rates came in at 90% in the U.S. and Canada, just 1% down from its record high of 91% in fiscal 2015. That is very impressive as the retailer recently increased its yearly membership rate for new signups.
Moving ahead, Costco continues to open new locations while growing its online sales as well. The retailer plans to open around 25 new stores in 2018, with half in the U.S. Apart from the U.S., it expects to open new stores in Korea, Canada, Mexico and Australia.
Although Costco’s membership growth rate has plunged recently, it does not appear to be a long-term issue. The retailer is on its way to opening its first store in China, which will certainly spur membership growth as it can easily replicate its optimistic experiences from its stores in countries other than the U.S. and Canada.
Summing up
Costco not only has a substantial competitive advantage but is also buoyant against online retail king Amazon.com (AMZN, Financial). While most of the brick-and-mortar retailers are struggling with declined traffic due to rising online sales, Costco carries on growing at a steady rate.
Shares of Costco have plunged almost 4% from their new all-time high, and may further move downward in the near future, but the retailer’s long-term growth still looks intact. The retailer’s growth opportunities are significantly better than those of its competitors. As a result, investors should continue to hold the stock for more returns in the future.
Disclosure: No positions in the stocks mentioned in this article.
