Key Takeaways From Costco’s Fiscal Q2 Earnings

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Costco (NASDAQ:COST) reported relatively disappointing fiscal second quarter results on Thursday, March 2, as both its revenues and earnings missed consensus estimates. However, the company’s overall revenue increased 5.7% year-over-year (y-o-y) to $30 billion during the quarter, driven by incremental revenues from new stores and growth in membership fees. In Q2, Costco’s membership revenue grew 5.5% y-o-y to $636 million.

Costco’s selling, general and administrative (SG&A) expenses increased 5.1% y-o-y to around $3 billion due to increased payroll expenses. The company reported net earnings of $1.17 per share, a 5.6% y-o-y decline, which missed consensus estimates by 19 cents.

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In the second quarter, Costco’s comparable store sales increased by 3%, including the impact of gasoline prices and currency effects, compared to market expectations of 3.5% growth. The company’s comparable sales saw solid growth in the U.S. and Canada, but fell in international markets. Further, it should be noted that the strengthening dollar and gasoline effects did not have a major impact on the company’s earnings for the quarter, as the company also saw 3% growth on a comparable basis excluding these factors.

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Costco Announced A Hike In Its Annual Membership Fees

Costco announced that it will push through a membership fee increase to new members from June 1. According to management, the company will hike the price of its Gold Star membership by $5 per year to $60, and raise its Executive membership fee to $120 from $110. [1] In addition, the company reported that the maximum annual 2% reward associated with the Executive membership will increase from $750 to $1,000. The retailer  last increased its membership fee in November 2011.

This fee hike comes after Costco stopped accepting American Express at its physical and digital stores, and began accepting Visa cards, including the new Citi Visa Anywhere card last year. Almost 11.4 million American Express cards were transferred over to Citi during this conversion process. The company has also reportedly approved more than 1 million new Citi Visa cards since the transition in June 2016.

Costco relies heavily on its membership fees, despite the fact that these fees account for only 2% of the company’s total revenues. The company’s membership fees contribute around 17% of the company’s value, per our estimates, given the low costs associated with this revenue stream. In fiscal 2016, Costco’s operating income was $3.6 billion, of which $2.6 billion came from membership fees. Like other large retailers, Costco makes small margins on most of its items in its stores, and the membership fees help offset these low margins. Paid memberships at Costco have grown at a CAGR (compounded annual growth rate) of 6.5% over the past two years to 47.6 million in fiscal 2016. Going forward, we expect the hike in membership fees to add substantially to the company’s top and bottom line. We forecast the company’s revenue from membership fees to grow at a CAGR of nearly 6% through 2021.

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Future Outlook

Costco did not publish guidance for the current quarter, but consensus estimates for the company’s fiscal third quarter call for earnings of $1.36 per share and revenues of $28.3 billion, implying growth of about 10% and 6%, respectively.

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Have more questions about Costco? Please refer to our complete analysis for Costco

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Notes:
  1.  Costco Press Release []