Strong growth in Costco members drives profit surprise

Investors pushed up Costco’s share price more than $5 Thursday after the company reported higher than expected quarterly profit and said new member sign-ups grew a robust 15 percent.

The upside surprise in profit, achieved despite slow sales growth, represented a turnaround from two quarters in which profits came in below expectations.

For the quarter ended May 8, the Issaquah-based warehouse giant reported earnings per share of $1.24, up from $1.17 a year ago. Wall Street analysts had expected earnings per share of $1.22.

Profit of $545 million was up 5.6 percent from the same quarter last year.

Investors liked the news, sending Costco’s share price up almost 3.6 percent to $149.71 at the end of trading.

Also good news for Costco: Membership fees, a high-margin item for Costco, rose 5.8 percent to $618 million.

New member sign-ups increased 15 percent both in the U.S. and worldwide, Chief Financial Officer Richard Galanti said in a conference call with investors Thursday.

Membership renewal rates in the U.S. topped 90 percent and was 88 percent worldwide, he said.

Total membership was 46.9 million households.

Ken Perkins, an equity analyst with Morningstar, said in his research note Thursday that around 70 percent of Costco’s operating profit comes from membership fees and that he expects Costco to increase its membership fees by about 10 percent in 2017.

“Therefore the firm should benefit from the solid new member growth this year,” he said.

The company said in March that it would be looking into increasing membership fees, something it hasn’t done since 2012.

Also on the positive side: Total sales were up 2.6 percent from a year earlier to $26.77 billion, thanks in part to new store openings.

But that total sales figure was still below the $27.07 billion Wall Street analysts expected.

Adding to the worries: So-called comparable sales — those at stores open at least a year — remained flat over the quarter in the U.S., while rising only 1 percent in Canada and declining 2 percent in all other countries where Costco operates. Overall company comparable sales were flat for the quarter.

Lower gas prices and weaker foreign currency compared with the strong dollar continued to have an impact.

Excluding those factors, the company said, comparable sales were up 3 percent in the U.S., 8 percent in Canada and 3 percent in other countries over the quarter. Overall company comparable sales were up 3 percent for the quarter.

As previously announced, Costco raised the minimum wage it pays entry-level workers by $1.50 to $13 to $13.50 an hour starting this quarter. That move added about $6 million in expenses for the quarter.

In the call with investors, Galanti gave more details about the company’s switch from American Express to Visa as the only credit card it will accept in its U.S. stores, and to Citigroup becoming the exclusive issuer of its co-branded credit cards.

New cards are being mailed to members now, with the switch to happen June 20. Customers should expect their cards from now up to a week before June 20, Galanti said.

The transition has meant Costco has lost about $11 million so far from not signing up people for new co-branded cards since fall, Galanti said.

But the switch to Visa and Citigroup should pay off longer term for Costco as it will face lower merchant fees.

Currently, about 40 percent of Costco’s sales are paid for with American Express cards, with about two-thirds of that on the co-branded cards, Galanti said.

“The same thing will happen to Visa,” he said. “Our goal is to get that co-branded card to be your top-of-wallet card.”