Costco beats Q1 earnings estimates with a potential membership fee hike looming

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Costco (COST) sported some bulked-up earnings for its fiscal 2024 Q1 results.

For the quarter, Costco reported adjusted earnings per share of $3.58, higher than Wall Street expectations of $3.41. Revenue came in at $57.8 billion, up 6% year over year, compared to expectations of $57.71 billion, per Bloomberg data.

Same-store sales, excluding gas and foreign exchange, came in lower than expected, dragged down by its performance in the US. Total same store-sales jumped 3.8% last quarter, compared to 4.3% expected.

In the US, same-store sales growth came in at 2.0%, compared to the 2.77% expected. Canada beat estimates with a 6.4% same-store sales growth, while international stores also reported a higher-than-expected increase of 11.2%.

CFO Richard Galanti said foot traffic is something the team is “happily surprised” about, building on momentum gained during the pandemic.

“The two years of COVID, we benefited in many ways from more members and more volumes and we’ve not only kept it, we’re continuing now to add to those levels, so we feel very fortunate in that regard,” he said on a call with investors.

He added that consumers have begun to return to buying discretionary items as well, after a tough year with high interest rates and the return of student loan payments.

The wholesale giant announced a special cash dividend of $15 per share, with an aggregate payment amount of $6.7 billion. This is the company’s fifth special dividend in 11 years and will be paid out on Jan. 12.

Costco’s shares are up 39% year to date, handily beating S&P 500’s (^GSPC) 23% gain.

Cowen analyst Oliver Chen told Yahoo Finance Live that Costco is one of its top picks, calling its private label Kirkland “pretty legendary.”

Meanwhile, Oppenheimer analyst Rupesh Parikh removed the retailer from its top pick rating “due to valuation following significant outperformance lately.”

Customers using Costco Self-service check out area, Queens, New York. (Photo by: Lindsey Nicholson/UCG/Universal Images Group via Getty Images)Customers using Costco Self-service check out area, Queens, New York. (Photo by: Lindsey Nicholson/UCG/Universal Images Group via Getty Images)

Customers using Costco self-service checkout area, Queens, New York. (Lindsey Nicholson/UCG/Universal Images Group via .) (UCG via .)

The earnings rundown:

Here’s what Costco reported in its fiscal first quarter versus Wall Street estimates, according to Bloomberg data:

  • Net sales: $57.8 billion versus $57.71 billion expected

  • Adjusted EPS: $3.58 versus $3.41 expected

  • Same-store sales growth: 3.8% versus 4.30% expected

    • U.S. same-store sales growth: 2.0% versus 2.77% expected

    • Canada same-store sales growth: 6.4% versus 5.27% expected

    • Other international: 11.2% versus 9.24% expected

  • E-commerce sales growth: 6.30% versus 6.10% expected

During the quarter, the company sold over $100 million worth of 1 oz. gold bars, which went for nearly $2,000 online for members of the wholesale club as consumers looked for alternate investments.

On the earnings call, Galanti shared further details about e-commerce. He said the company sold “e-gift cards on everything from restaurants to golf to airlines.”

There’s even a treat for well-heeled last-minute shoppers.

“For you last-minute shoppers out there, there is a Mickey Mantle autographed 1951 rookie card in nearly perfect condition and it’s on sale online for $250,000,” Galanti said.

Costco’s app was downloaded 2.75 million times during the quarter and now has 30.5 million users, a 10% increase year over year. Galanti said e-commerce had a “lot of strength” and the team is in the middle of a two-year plan to ramp up their online presence.

This earnings results come as CEO Craig Jelinek is stepping down from the helm, effective Jan. 1, 2024. Ron Vachris, who has served as COO and president since February 2022, will take the top spot.

“At the end of the day, the reality is we’re staying the course,” said Galanti, who called the transition “pretty seamless” given Vachris started at a Price Club (which merged with Costco) when he was 17 years old, and has been with Costco for more than 40 years.

At the end of November, Costco lost one of its longtime board members, Charlie Munger. The famed Berkshire Hathaway (BRK-A, BRK-B) investor had served as a director since 1997, and had long expressed his love for the business.

“He was a legend to me. A tremendous asset to Costco,” Jelinek told Yahoo Finance.

Will Costco raise membership fees? Wall Street thinks it’s coming soon.

Membership fees, a key revenue stream for the wholesale retailer, came in at $1.08 billion, less than Wall Street estimates of $1.09 billion. In the fourth quarter of fiscal 2023, the company brought in $1.51 billion in membership fee revenue.

While there was no indication of a price hike yet, it could happen soon.

The company raises prices every five years and seven months on average. Costco last raised membership fees in June 2017, but announced the change that March.

“We believe a membership fee increase will likely come next summer,” UBS analyst Michael Lasser wrote in a note to clients, citing that it did not happen in the previous fiscal year as to not “further strain its customers, whose budgets were already pressured by inflation.”

Now that inflation has moderated, “Costco may will be more likely to increase its membership fees.”

A Costco Gold Star membership costs $60 per year, while an Executive Membership goes for $120.

At the end of Q1, there were 72 million paid household members, up 7.6% from last year, and 129.5 million cardholders, up 7.1%.

In Q4, the company had 71 million paid household members and 127.9 million cardholders.

When asked on the call if the company will raise fees, Galanti acknowledged that the retailer has “gone a little longer than the average increase.” All the variables — strong renewal rates, strong new sign-ups, strong loyalty — are in place for a raise.

“I’ll use my standby answer, my answer, it’s a question of when, not if,” concluded Galanti. “But at this juncture, we feel pretty good about what we’re doing.”

Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].

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