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Costco Wholesale Corp. (NASDAQ:COSTB) reported higher than expected profit for the quarter as a result of paying lower fees to new credit card partner, Visa Inc. (NYSE:VC). In addition, the company said members bought more appliances, electronics and hardware than anticipated.

The bonus sales and lower fees helped make up for a margin hit in the grocery and fresh food aisles according to CFO, Richard Galanti.


By The Numbers

Costco stock had fallen 8.7% so far in 2016 ahead of Thursday earnings report. Shares bumped up 1.4% to $149.60 in after-hours trading.

The company's selling, general and administrative costs rose 5.6% from a year earlier to $3.7 billion. Merchandise costs were up 1.8% to $31.65 billion.

For the 16 weeks ending Aug. 28, Costco reported a profit of $779 million, or $1.77 a share, $0.04 higher than the $1.73 analysts had expected. A year ago profit was $767 million, or $1.73 a share. Overall revenue rose 2.2% to $36.56 billion.

Amazon - The Elephant In The Warehouse

Costco has always worried about Wal-Mart Stores Inc. (NYSE:WMTA) and it Sam’s Club which competes directly with Costco. With Sam’s Club Costco has had to compete on a known playing field – both are warehouse stores, both have memberships and both try to convince customers to buy in bulk.

Suddenly Amazon.com Inc. (NASDAQ:AMZNC) has entered the picture. Amazon is an online retailer, not a warehouse. It does sell membership but offers much more than either Costco or Sam’s do with their memberships.

More importantly, Amazon’s annual revenue is expected to surpass Costco’s for the first time this year. This even though 6 years ago Amazon had less than half of Costoco’s annual revenue.

The Game Is Changing

In the past, warehouse clubs have been somewhat immune to companies like Amazon. Members buy in bulk and bulk purchases are too expensive for companies like Amazon to fulfill due to delivery costs. That was then.

Now Amazon is diving full bore into delivery including its own delivery service and soon, perhaps, even offering drone or self-driving vehicle delivery.

While drones and autonomous delivery vans are pie in the sky for now, Sam’s and Costco membership are somewhat stagnant while Amazon’s memberships have surged from less than 20% to 44%.


What Investors Should Do Is Not Cut And Dried

Even though many of the numbers seem to favor Amazon, when considering an investment, the results are definitely mixed. Citing Amazon’s mission (We seek to be Earth’s most customer-centric company) as the spoke from which all company branches grow, some view the company as the best thing since sliced bread.

Still others prefer Costco for its steady growth when compared with a tech company like Amazon. Those same pundits point to Amazon’s ridiculous P/E ratio as proof the stock has nowhere to go but down.

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