http://www.forbes.com/sites/greatspeculations/2014/06/02/rising-membership-propels-costcos-growth/
Rising Membership Propels Costco's Growth
Trefis Team , Contributor
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Amid an uncertain retail environment, warehouse giant
Costco posted strong results with 6% growth in comparable sales and 3% rise in net income. While the company’s revenues topped estimates, its earnings per share fell short by a small margin. Costco’s earnings per share came in at $1.07, while analysts were
expecting the figure to be around $1.09. Unfavorable foreign currency fluctuations had a negative impact of about $0.03 on the retailer’s EPS and 5 percentage points on its international comparable sales growth.
Excluding the impact of currency fluctuations and gasoline price deflation, Costco’s U.S. same-store sales increased by 6% and international same-store sales increased by 8%.
Increasing membership signups, rising membership fees and improving renewal rates boosted Costco’s results, and we expect this trend to continue in the future as well. The retailer recently opened its first store in Spain, where it hasinteresting growth opportunities. Costco’s online sales continued to grow at a robust pace in all its markets, which is a promising sign for the company. Overall, Costco appears to be headed towards a bright future.
Our price estimate for Costco stands at $121, implying a premium of less than 5% to the market price. However, we are in the process of updating our model in light of the recent earnings release.
See our complete analysis for Costco
Growing Membership Is Driving Costco
Over the last few years, Costco has seen a noticeable increase in the number of new members. While the retailer added 2.3 million members in fiscal 2009, more than 4 million customers signed up in fiscal 2011. The retailer’s membership base saw a rise of 3 million in fiscal 2012 and another 4.2 million joined Costco in fiscal 2013. Strong membership growth continued in fiscal 2014 as well, which is evident from strong third quarter data. New membership signups increased by 1% during the quarter with the addition of 1.2 million cards. The business member renewal rate improved to 94.4% in Q3 from 94.3% in Q2 and the Gold star renewal rate moved up to 89.7% from 89.6% in the previous quarter. Overall, renewal rate in the U.S. and Canada reached 90.6% from 90.4% (Q2) and in international markets, it soared from 86.8% in Q2 to 87.3% at the end of Q3.
Executive members play an important role in driving Costco’s sales as they represent one-third of Costco’s overall customers and two-third of its revenues. These members pay $110 as membership fee (as opposed to $55 paid by other members) to get 2% (maximum of $750) annual rewards on their purchases. Interestingly, the proportion of executive members in the overall membership base has been rising historically. During the quarter, over 300,000 new executive members joined Costco with total membership signups at 1.2 million. The proportion of new executive members in total new members was somewhat in line with historic averages.
