Dive Brief:
- Costco reported a year-over-year sales increase of 7.4% to nearly $34 billion for its third quarter, which ended May 12, according to a company press release. Comparable sales increased 7% in the U.S. and 5.5% companywide, with e-commerce sales jumping 22%.
- Membership renewal rates were at 90.7% in the U.S. and Canada, and member households increased by 400,000 quarter to quarter to 53.1 million, Costco CFO Richard Galanti said on an analyst call, according to a Seeking Alpha transcript.
- Revenue from membership fees rose 5.3% to $776 million. Operating income at the club retailer increased more than 5% to $1.12 billion, and net income rose 21% to $906 million, thanks in part to a one-off $73 million tax item.
Dive Insight:
Cowen & Co. analysts led by Oliver Chen described Costco as "rising to the retail challenge" in a Thursday client note emailed to Retail Dive.
The analyst team found from their quarterly customer surveys that overall satisfaction with Costco was at 78.8%, a 1.7% increase year-over year. "We are most encouraged by another quarter of improved satisfaction with prices, indicating the retailer continues to execute on its pricing strategy and sharpening price points across the box," Chen and his team wrote.
While gross margins fell slightly, BMO Research analyst Kelly Bania noted that Costco's gross margin as a percent of sales expanded at the fastest pace in about five years. "We continue to believe that COST's advantaged business model, consistent execution and increasing connection with its loyal membership base makes it deserving of its premium valuation, which is rare among retail/consumer staples," Bania said in emailed client materials.
Although Costco is a top performer among club retailers and focuses on customer satisfaction, CEO Richard Galanti said it has no plans to expand into grocery pickup unlike Walmart whose successful grocery e-commerce business is driven by its pickup program. Galanti explained that partnering with delivery services Shipt and Instacart are “ways to do that without us having to get into that business in a big way,” Galanti said. Instead, he wants Costco to focus on driving consumers into stores.
Galanti also noted that Costco has had considerable success upgrading its grocery selection, including private label, specialty and organic items.
"We're not just selling basic cheeses anymore," he said. "We're selling premium cheeses."
On the other end, just as the rest of the retail world, margins are on the minds of Costco leaders and investors. Galanti said that with past rounds of new duties, the company was actually able to pick up market share from other retailers at times.
Costco has been working with suppliers to mitigate the tariffs. "In some cases, it's being passed on [to vendors]," he said of tariffs. "In some cases, we're able to work to figure out how to move merchandise and then the impact of when the price increase does go through," Galanti said.
But the retail world is now facing the possibility of a broad-based increase of tariffs that would hit many of the remaining imports from China with 25% duties. Galanti said the company has been ramping up shipments ahead of the proposed fourth round of increases, along with other efforts.
"While the specter of increased tariffs looms over retail, we believe Costco is better suited than most to mitigate the impact," Morningstar analyst Zain Akbari said in a note Thursday. "Costco magnifies its buying power by offering a limited assortment, stocking less than 4,000 distinct items in store versus around 75,000 for a retailer like Target. This allows Costco to concentrate its sales, creating significant purchasing power."
