Costco Wholesale Corporation (COST): How Is This Retailer Leading the Race?

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Most of us have seen how the advent of online retail giants like, Inc. (NASDAQ:AMZN) and eBay Inc (NASDAQ:EBAY) has taken away a good chunk of market share from traditional brick and mortar retailers. This has led to quarters of weakening sales for huge retailers, who are now focusing on expanding their e-commerce operations. However, Costco Wholesale Corporation (NASDAQ:COST) provided a needed break to continuing retail weakness with excellent third quarter results.

Costco Wholesale Corporation (NASDAQ:COST)

Doing things that matter

Costco Wholesale Corporation (NASDAQ:COST)’s earnings for the third quarter surged 19% to $1.04 per share, beating Street estimates by $0.01. Revenue for the quarter, including membership fees, came in at $24.08 billion, an increase of 7.9% over the prior year period. Same-store sales took the limelight as it grew approximately 5% y-o-y. As we know, same-store sales is a highly important metric for analyzing retailers, and a growth of 5% is very impressive, keeping in mind the challenges traditional retailers are facing. Gross margin improved by 12 basis points to 10.67% compared to same period last year.

More and more members

The company has given its investors, and the retail industry, a number of reasons to rejoice. A biggie among them is an increase of 12% in its membership fees to $531 million compared to last year. A unique thing about Costco is its membership model, which contributes most to its margins as there is minimal additional cost involved against extra revenue. A big kudos goes to Costco for offering a beautiful shopping experience because of its healthy sales culture and customer management principles.

This is the reason it is seeing a continuous boost in membership fees, not just from renewal of memberships, but also from a host of new ones. As per the earnings call, new membership signups were very strong, up 19% y-o-y. The brilliant thing about Costco Wholesale Corporation (NASDAQ:COST)’s management is that it realizes memberships are one of the company’s major strengths, and the company capitalizes wonderfully on this. It has utilized its pricing power strategically by increasing membership fees by $5 and $10 since November 2011.

These increases are strategic because they do not disturb demand (as most of the members do not mind paying these amounts) and also enable the company to offer great deals and bargains. On top of that, membership fees almost wholly contribute to the margins of the company. It has also attracted a diverse bunch of people belonging to different age groups, social classes, and working environments.

Other retailers are still struggling

Retailers like Wal-Mart Stores, Inc. (NYSE:WMT) and Target Corporation (NYSE:TGT) have lost a sizable market share to online retail companies, and are now desperately trying to create strong e-commerce operations. Target recently opened up a new technology office that will exclusively focus on the expansion of e-commerce operations. Its first quarter earnings failed to meet expectations, as earnings dropped to $0.81 per share from $1.03 in the previous year. The adjusted earnings took a hit of 5% and came in at $1.05 per share.

As highlighted in the earnings call, its sales in weather-related categories took a major hit, and as a result the company achieved lower-than-expected sales. As a result of poor performance, management revised its full-year guidance for adjusted EPS in the range of $4.70-$4.90, compared with prior guidance of $4.85-$5.05. Even if we discount tough weather conditions, weakening sales in categories like apparel remains a huge concern for the company.

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