3 Things Costco Wants You to Know

A customer walks through a warehouse aisle.

Many retailers are posting improving operating results these days as consumer spending marches higher. But the numbers that Costco (NASDAQ: COST) just announced stand out as particularly strong. The warehouse giant on Thursday revealed sharply higher sales growth -- both in its stores and online -- spiking membership fees, and a healthy jump in net income.

Chief Financial Officer Richard Galanti held a conference call with Wall Street analysts to put those operating trends into perspective. Below are a few highlights from that presentation (all quotes are Galanti's).

Strong store traffic

Costco's sales at existing locations, or comps, improved by 7.9% to kick fiscal 2018 off with a bang. That figure represents a major growth acceleration, given that comps came in at 4% in each of the past two fiscal years.

Customer traffic gains made all the difference. In fact, shopper transactions sped up from a 4% pace last quarter to nearly 7%, putting Costco well ahead of rival retailers. Wal-Mart Stores ' (NYSE: WMT) Sam's Club recently posted a 3.6% traffic bump that powered its 2.8% comps improvement. Target (NYSE: TGT) traffic rose by 1.4% as part of a 1% comps increase for that retailer.

Costco is also posting higher average spending per shopper visit while both Wal-Mart and Target announced shrinking results on this metric as they cut prices to attract more customers.

E-commerce opportunities

Costco attacked the online selling opportunity from a few different angles during the quarter, including by testing out two-day dry grocery delivery options and same-day delivery choices for many of its perishable food items. Investments in its website yielded better sales growth and improved customer satisfaction, which culminated in a 40% spike in overall revenue.

The best news for shareholders on this score is that Costco isn't being forced to choose between a booming online business and healthy results at its physical warehouses. On the contrary, in a win-win for both segments, e-commerce promotions drove traffic to its shops during the quarter while in-store signage helped power faster growth in the digital channel.

Healthy membership metrics

Costco's 17% profit increase was helped along by a 10% spike in fee income, which benefited from both the rising subscriber base (there were seven new warehouse openings in the quarter) and the membership fee hike that the retailer announced last year. The earnings lift from that price hike will only accelerate over the next few quarters, management said, as it impacts a larger portion of the subscriber base through the fiscal year.

Renewal rates held steady at 90%, which is a bit of a surprise given that management had predicted they would begin climbing back toward 91% as the impact faded from Costco's disruptive credit card switchover. Still, renewal rates didn't decline even as membership fees increased. If anything, the retailer's healthy traffic trends show that members are getting plenty of value out of their subscriptions.

Investor takeaway

Shareholders might have liked to see improving renewal rates this quarter, but that slight miss doesn't detract much from an otherwise impressive quarterly report. Ultimately, Costco's core warehouse business is growing at a market-thumping rate today at the same time that management finds new ways to incorporate the online channel into its retailing strategy. These wins put Costco on track for a great fiscal 2018 ahead.

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Demitrios Kalogeropoulos owns shares of Costco Wholesale. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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