Retailer Costco Wholesale Corp. reported a higher-than-expected quarterly profit on Tuesday, boosted by a rise in membership fees and market share gains.
The news caused some on Wall Street to conclude that the largest U.S. warehouse club chain has largely managed to buck the macro weakness that other retailers have talked about following a recent rise in payroll taxes and gasoline prices.
Costco, which has gas stations at its stores, is willing to take a hit on margins to keep prices low so shoppers visit more often. It offers everyday items like bananas below supermarket prices, hoping customers will stock up on other goods as well.
Members pay up to $110 per year to shop at Costco’s cavernous stores and website, which sell items ranging from dog food to diamond rings. The fee revenue pads the bottom line, allowing the company to offer low prices and take in thin profit margins on products it sells.
“The retailer’s ability to keep members engaged and coming back for more is unparalleled,” Planet Retail analyst Sandy Skrovan said, adding that Costco was outperforming its peers in terms of sales growth and productivity.
The company competes with BJ’s Wholesale and Wal-Mart Stores Inc.’s Sam’s Club chain.
Janney Capital Markets analyst David Strasser maintained his “buy” rating on Costco shares, saying Costco remained one of the most predictable retailers, with strong traffic growth and operating trends.
“The machine, known as Costco, continues to gain market share and square footage growth,” Strasser said.
Last month, Wal-Mart’s results showed U.S. consumers were worried about the impact of higher payroll taxes and gasoline prices, along with slow tax refunds that put some spending on hold.
Costco’s net income rose to $547-million, or $1.24 a share in the second quarter ended on Feb. 17 from $394-million, or 90 cents a share, a year earlier.
Excluding a tax benefit from a special cash dividend, Costco earned $1.10 a share, beating the analysts’ average estimate of $1.06, according to Thomson Reuters I/B/E/S.
Sales rose 8 per cent to $24.34-billion, while membership fees rose 15 per cent to $528-million.
The Issaquah, Wash.-based company raised fees for most U.S. and Canadian members by 10 per cent on Nov. 1, 2011. It previously said the fee increase seemed to have little to no effect on renewal rates.
Shoppers have been filling up more often at Costco, which typically prices gasoline lower than nearby competing stations do.
The company may have also benefited from redemptions of annual American Express rewards, which members received in February.
Members who sign up for an American Express card through Costco earn cash back on eligible purchases, including what they buy at the chain. They can redeem or cash in their reward coupons at Costco stores through August.