Dive Brief:
- Costco posted better-than-expected earnings of $640 million, or $1.45 per share, up 17% from the year-ago period, according to a company release. The club retailer's same-store sales increased 7.9% during the quarter, which ended November 26.
- E-commerce sales increased 42.1% during the quarter, driven by improvements to the company website, its new grocery delivery service and an enhanced partnership with Instacart.
- Membership rates, which have dropped in recent quarters, held steady for Costco at 90%, while membership revenue jumped 9.8% to $692 million compared to the year-ago period. "Overall, results were solid with very strong sales numbers and good margins," Edward Jones analyst Brian Yarbrough wrote in a note. "We were also positive that membership renewals seem to have stabilized."
Dive Insight:
Costco continues to show the strength of its store-focused model in the Amazon age. Its value perception among customers along with the quality of its products, the strength of its private label sales and the treasure-hunt appeal of its shopping experience continues to drive growth, including a fourteenth straight quarter of comp-store sales increases.
Interestingly, e-commerce was one of the brightest points for the club retailer in the quarter, up 42.1%, which is close to twice the average rate for the grocery industry right now.
New initiatives, including expanded online offerings a dedicated grocery delivery service, boosted results in the channel. In October, Costco launched CostcoGrocery, a service that offers two-day delivery on shelf-stable products ordered through its website with free shipping for orders over $75. Costco announced at the same time that it would expand its delivery relationship with Instacart to include more locations and a wider selection of fresh items like meat, eggs and produce.
In a conference call with analysts Thursday, Costco CEO Richard Galanti said most of the company’s e-commerce growth came from Costco.com and CostcoGrocery sales. He characterized its expanded relationship with Instacart as a "soft opening" and said the partnership will see an increased promotional push in the coming months.
"We both have chosen for the first two-three months for this thing to basically have a soft opening, if you will, to make sure that we don't screw it up," he said. "And when I say we don't screw it up, it's growing very nicely. But clearly, when we market it, we think it will take off even more."
Overall, Costco remains focused on its store experience, which differentiates it from Amazon and other online players. The club retailer offers a range of fresh products, including a large assortment of organic produce that draws members to its stores, according to analysts.
Low prices are also bringing in customers. A recent price check conducted by JP Morgan found that Costco is on average 58% cheaper than Whole Foods. Research also shows its beating Amazon on pricing — sometimes by huge margins. LendEDU, an online student loan refinancing marketplace, found that Amazon prices on average were 56.48% more expensive than the same products found at a Costco store shopped by company researchers.
Galanti said Costco is focused on supporting its discounts with promotions that drive home their value.
"If we can figure out and we have, we think, figured out how to communicate effectively with our members on some particularly hot buys, it really drives business, and not just online," Galanti told analysts.
Another reassuring sign is Costco's membership renewal rates, which has steadied after a few declining quarters. This is an important metric for analysts, as it indicates customer interest and forecasts the company's future financial performance, with members essentially locked in for regular trips to the retailer.
Amazon still remains a threat to Costco. Half of the club retailer's shoppers are Prime members, and it remains to be seen how the e-tailer will leverage its Whole Foods buy. But for the foreseeable future, analysts see continued strong performances from Costco.
"We believe [Costco] is insulated from Amazon and is well positioned to continue to increase both its market share and new memberships," Barclays analysts wrote in a recent note.