Costco's Answer to Tariff Fears Is Working
It remains well-positioned to nab more consumer wallet share as its footprint continues to grow.
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Let’s round out the Portfolio’s quarterly earnings report from Thursday night by turning our attention to Costco COST.
In response to the membership warehouse company’s better-than-expected May quarter results, we reiterate our $1,150 price target and, for now, our Two rating given the proximity to that target. As Costco delivers forthcoming monthly revenue reports, like we’ve done in the past we’ll revisit that price target as needed. Our thesis behind the Portfolio’s position in COST shares remains unchanged – we continue to see the company winning consumer wallet share, especially as other retailers boost prices to combat the impact of tariffs, while its higher margin membership fee revenue stream benefits from last year’s price target increase and the company’s expanding footprint.
Costco’s May Quarter Results
The company reported EPS of $4.28, besting the Wall Street consensus by $0.04 per share, on revenue that rose 8.0% year over year to $63.2 billion, edging out the market’s expectations for $63.13 billion. Net sales for the quarter tallied $6 billion, up 8% year over year fueled by adjusted comp sales growth of 6.5%, including 8.6% in the U.S, and the expansion to 905 open warehouse locations versus 897 exiting the prior quarter and 878 for the year-ago one.
Per management, foreign exchange rates negatively impacted the translation of international net income to U.S. dollars leaving an impact of $35 million, or $0.08 per diluted share for the quarter. Management also shared that during the quarter, sales of its private-label Kirkland Signature (KS) items outpaced our overall sales growth. While we and others tend to focus on the company’s membership business model, its KS lineup is also a force to be reckoned with and one that resonates with increasingly cost-conscious consumers. That along with more favorable merchandise costs compared to the prior quarter and the growth in membership fee revenue led Costco’s overall operating margin to reach 4.0% in the quarter, up from 3.6% in the prior one.
Speaking of that high-margin membership fee revenue, it reached $1.24 billion in the quarter, up more than 10% year over year and mid-single digits. The drivers behind that increase won’t be a surprise as Costco continues to roll through the effect of last year’s membership fee price increase and its growing membership base. Costco ended the quarter with 79.6 million paid household members, up 6.8% versus last year, and 142.8 million cardholders, up 6.6% year over year. The number of paid executive memberships stood at 37.6 million exiting the quarter, up 9% versus last year. In total, executive members represented 47.3% of paid members but 73.1% of worldwide sales.
As Costco continues to reap the benefits of last year’s membership price increase it should help minimize the impact of tariffs on Costco’s business even as the company, like others, looks to source more domestic product and that from lower tariff geographies. The company targets 914 worldwide warehouse locations by the end of the current quarter, making it a relatively safe bet it will continue to take consumer wallet share and its membership fee revenue should continue to grow. In other words, business as usual.
At the time of publication, TheStreet Pro Portfolio was long COST.
