Yahoo Finance 3 Things Costco Management Wants You to Know
Every time something shifts in the retail space, people question whether Costco (NASDAQ: COST) can continue its success.
It happened again when Amazon.com (NASDAQ: AMZN) bought Whole Foods. Investors and analysts all jump to the conclusion that this is the move that will finally sink the warehouse club. Then sanity sets back in, Costco reports its usual increase in members, and any losses its stock sustained are slowly recovered.
Perhaps it's because the membership-based warehouse club has proved to be an outlier when it comes to competing with Amazon, but it does feel sometimes as if stock analysts consistently underestimate the company. Costco isn't other retailers and grocery chains. It's a company that has built an Amazon-resistant model that consumers clearly like.
And that's why it's not surprising that the company reported a 15.8% increase in Q4 sales (albeit with the quarter lasting an extra week). For the full year, sales climbed 8.7% (again there was an extra week), and global comparable sales jumped 4.1% for fiscal 2017 while they came in at a 6.1% increase in Q4.
That left CFO Richard Galanti a lot to be happy about during the chain's Q4 earnings call.
Costco has not struggled like many other retailers which compete with Amazon have. Image source: Costco.
Membership revenue keeps rising
One of the reasons Costco has been able to compete with Amazon is that it makes most of its money from membership sales. That revenue line got a boost beginning in June, when it raised prices by $5 a year for Gold Star members and $10 a year for Executive Members.
"Membership fees were up 13.4%, or $111 million year over year," he said. "Of the $111 million increase in fees year over year, about $15 million [was] related to the membership fee increases we took."
About half of the $15 million came from the June 1 increase in the U.S. and Canada, while the rest comes from a September 2016 price increase at its international locations. The full impact of those increases will take two years, based on how the company books the revenue.
Renewals remain strong
Galanti did acknowledge what he called a "slight negative renewal rate impact" from the company's U.S. credit card conversion. That switch, from longtime provider American Express to Visa, happened more than a year ago, but the CFO expects it to be a slight drag for another quarter or two,
Still, numbers are climbing. At the close of Q4, the warehouse club had 38.6 million Gold Star members, up from 37.8 million at the close of the previous quarter. It also gained 274,000 Executive members quarter over quarter and saw total member households rise from 48.6 million at the close of Q3 to 49.4 million at the end of fiscal 2017.
Costco is responding to Amazon
While Galanti rarely mentions the competition during these calls, he specifically named Amazon during this one. He said that increased delivery options by the online leader and other rivals were not affecting Costco, before laying out the warehouse club's plan to move into delivery.
The CFO pointed out that "sales and our comps are strong and have even trended up." He also added that shopping frequency has trended up and that he believes Costco's value proposition is stronger than ever. Despite that, Galanti made it clear that his company was not assuming the status quo will hold forever. Later in the call, he gave details on two new efforts Costco has started in the delivery space.
The first method offers free two-day delivery on any non-perishable food or sundry item on orders over $75 throughout the United States. The second, a partnership with Instacart, offers same-day delivery on both dry and fresh groceries at 376 of the chain's U.S. stores.
"You can find both sites by going to Costco.com and then clicking on the Grocery tab," Galanti said. " You'll then be taken to a page offering and explaining both of these new online delivery options."
A measured approach
Costco has going with the philosophy that slow and steady wins the race. The company has never reacted quickly to the many perceived threats it faces from Amazon and other online rivals. The chain was slow to build a digital presence, but it has steadily improved in that area.
These delivery efforts are in the same fashion as the company's other moves. They're baby steps that will be evaluated and tweaked steadily.
Amazon may present a risk to Costco as the online retailer improves and refines its own delivery methods. That said, the warehouse club has shown that it can adapt and adjust to compete, and there's no reason to believe that won't continue to be the case.
Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.
