It’s no secret on Wall Street that Costco‘s (NASDAQ: COST) business is firing on all cylinders. The company gained market share even as its industry surged during the COVID-19 pandemic. Customers have been consolidating shopping trips in response to the virus threat, and that’s great news for the world’s leading warehouse retailer.
Costco’s next earnings update, slated for March 4, will again show benefits from those favorable trends. But investors could see other good news in this report around shopper loyalty, cash flow, and the growth forecast.
Let’s take a closer look.
Costco reports its sales results each month, and so we already have a good reading on growth. Sales rose 11% in December and jumped 16% in January to mark an impressive performance against rivals like Walmart (NYSE: WMT). Tuesday’s report will reveal the February trends while including key updates on shopper satisfaction.
We’ll get two updated metrics describing membership loyalty. The first is customer traffic, which has been rising all year even as it dropped at Walmart and other retailing chains. The second is the membership renewal rate that last quarter held steady near a record-high 91%. Look for each of these figures to impress on Tuesday, suggesting healthy momentum heading into 2021.
Reinvesting the gains
The outlook isn’t as bright for profitability. Target (NYSE: TGT) has notched higher margins recently as shoppers tilt spending toward premium categories like consumer electronics and home furnishings. Costco will see a similar demand lift, but management directs all those gains right back into the business to protect its price leadership.
That’s the right long-term strategy since it boosts membership loyalty and promotes higher average spending. But just don’t expect Costco to report anything like the operating margin surge that some of its peers have reported.
Cash and growth outlook
Walmart recently warned investors to expect nagging cost pressures over the next few years as the chain spends heavily to support all the extra annual demand that 2020’s consumer spending shifts created. Those initiatives include higher wages and increased spending on e-commerce warehousing and fulfillment.
Costco faces similar pressures, having added $14 billion to its sales footprint in the last complete fiscal year. That’s another reason for investors to brace for reduced cash returns in 2021, especially after last year’s special dividend payment.
On the bright side, it has been a few years now since Costco announced an annual membership fee increase, and it might be approaching that time again. Shoppers are clearly getting value from their subscriptions, after all, with average spending up 9% and traffic jumping 7% in the most recent quarter. It might make sense to roll out the next increase now that the COVID-19 threat is passing and demand is still high.
Any membership increase would immediately amplify earnings since Costco gets most of its profits from those steady annual checks. Yet shareholders should be more even more excited about the fact that Costco has room to increase these fees without slowing its growth. The subscription fee is a reflection of the value that the retailer is providing to its customers. And rising rates confirm that shoppers are increasingly turning to Costco to fulfill more of their shopping needs.
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