Unlike most retailers, Costco realizes most of its profit from membership fees. This will be the company’s first membership increase since 2011.
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In its Q2 earnings report Thursday, Costco said fees from memberships rose 5.5% to $636 million. Profit for the period fell 5.7% to $515 million.
Revenue was up 5.7% to $29.8 billion, which was the highest increase since November 2014. Analysts had projected revenue of $29.9 billion.
As a result the expected profit of $1.36 per share didn’t materialize. At $1.17 per share profit fell a sizable $0.19 below analyst estimates.
Comparable store sales for the quarter grew 3%, just under Wall Street expectations of 3.2%.
Compared To The Competition
Costco may have disappointed investors but it is not alone. J.C. Penney Co. Inc. (NYSE:JCPC) said it planned to close 140 stores recently. Target Corp. (NYSE:TGTC) missed on both the top and bottom lines, Best Buy Co. Inc. (NYSE:BBYC) missed its mark and Moody's Analytics reported that the number of U.S. retailers listed as distressed had tripled over the last 6 years.
Although Costco isn’t in the distressed category, those that are can wreak havoc on those that are not – through promotional pricing and other desperation tactics. According to Moody's Vice President Charlie O'Shea, "This leaves stronger firms with the choice of either competing in a race to the bottom, or giving up sales in order to preserve margin."
Despite the general malaise in retail, Costco is in better shape than many. The company had a better holiday season than most competitors and the membership increase is sure to boost the confidence of investors.
The company has benefited from its switch in 2016 to Visa Inc. (NYSE:VC) branded credit cards. According to JPMorgan Chase & Co. (NYSE:JPMC) 3 times as many households have Visa cards as the American Express Co. (NYSE:AXPC) cards Costco used to honor.
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Border Tax Effect
Like most retailers, Costco stands to lose if Congress passes a border tax. As Costco CFO, Richard Galanti explained to analysts, “We spent our whole lives driving down prices. (For) so many items, it is not a question of let’s buy them here instead of outside of the U.S., they don’t exist here."
The saving grace for Costco and other retailers at this point is that nobody really knows what the final plan will look like. With reports of a 20% tax on imports, Galanti says that despite the uncertainty, “a 20% tax is a 20% tax.”