Costco (NASDAQ:COST) reported strong Q1 results, witnessing a 13% increase in net sales over the same period last quarter. This increase was driven by higher gasoline prices and positive effects of foreign exchange. Costco recently raised membership fees by 10% on Nov. 1 for its U.S. and Canadian members, which contributed 7.5% to the revenues. (See our previous post: Costco Hikes Membership Fees Amid Slow Retail Environment) Costco’s share price witnessed a slight dip after the earnings announcement on Decemeber 8 as investors reacted negatively to the fall in profit margins. It traditionally competes with warehouse club operators including BJ’s Wholesale Club (NYSE:BJ) and Sam’s Club, in addition to large retailers like Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY) and Target (NYSE:TGT).
Costco witnessed strong renewal rates of 89% in the U.S. and Canada and 85% worldwide. Its new member sign-ups in Q1 were also up 15% yoy. The recent hike in membership fees, announced by the company effective 1st November, didn’t have much negative impact on membership revenues and member sign ups. International openings, especially in Asia and Australia last year, contributed significantly to new member sign ups.
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In Q1 2012, Costco opened its warehouses in 4 new locations, one each in Pennsylvania, Texas, Wisconsin and Georgia. In 2012, it has plans to open in 20 net new locations, 11 of which will be in the U.S., one each in Canada and the U.K.; and 7 in Asia.
Costco is the second largest retailer in the US and the largest in warehouse club category with revenues of about $80 billion in calendar year 2010. Costco operates on the business model of charging membership fee from its customers in exchange for heavy discounts on selected brands of a wide variety of merchandise. According to our analysis, the Core Merchandise US segment is the most valuable to the company. Costco has built a strong relationship with its customers and is positioned to thrive in a weak economy. We believe Core Merchandise US is more valuable than Core Merchandise International given its higher penetration of warehouses and higher revenue per square foot in the US locations.