Competition with price-slashing wizard Amazon be damned, Costco (COST) is crushing it – likely because its wealthier shoppers have more money in their pockets thanks to the Trump tax cuts.
Here are a few key factors behind Costco’s impressive earnings.
By the numbers: Armed with more money in their paychecks while watching an ongoing bull market in stocks, Costco members – who typically earn on average $100,000 a year – came out in force during the fourth quarter ended Sept. 2. Same-store sales rose a heady 10.8%. Online sales climbed 26.2%, though that cooled from a 32.2% pace in the fiscal year. Renewal rates ticked up to 90.4% from 90.1% a year ago.
“Membership renewal rates are impressive and seeing slight progress all while comparable-store sales remain best-in-class,” said Jefferies analyst Chris Mandeville in a note. The company finished its fiscal year with 94.3 million members, up from 93 million last year. With Amazon breathing down its neck 24/7, Costco’s quarter is a real standout. Costco’s showing is even more of a nod to economic strength seeing as it hiked its basic membership fee by $5 last year and noted on its earnings call that members are feeling some inflation hit their wallets – but no drop-off in the pace of sales growth in stores or online.
The economic story: Costco’s strong quarter comes amid an ongoing healthy economic expansion. The U.S. economy grew a robust 4.2% on an annualized basis in the second quarter, spurred by tax cuts for companies and individuals. Fed Chairman Jerome Powell, who has been on a hectic speaking tour of late to promote the economy, said in a speech this week the U.S. economy was in “remarkably positive” shape. The jobless rate is below 4%: all in all, a very Costco-friendly macroeconomic backdrop.
The bottom line: Remember, it’s a privilege to shop at Costco. Walking into a local Walmart and loading up a shopping cart doesn’t require a membership card. An executive-level membership at Costco — which gives rewards points back – costs $120 a year. There is a service fee to have groceries shipped from a Costco store using Instacart. If the economy wasn’t firing on all cylinders, Costco wouldn’t be able to present the earnings it just did.
In the end, Costco’s stock is up 23% year to date for a reason: confident consumers, confident spending decisions. And provided the economy doesn’t cool off too much in 2019, there will be a reason why Costco’s stock could be even higher.
Brian Sozzi is editor at large at Yahoo Finance. Follow him at @briansozzi.