This portfolio holding's earnings showed once again how it sets itself apart form other retailers.


Action Alerts PLUS holding Costco (COST) reported May quarter EPS of $3.43 per share, $0.12 better than the consensus forecast. Revenue rose 2.0% YoY to $53.65 billion, missing the $54.58 billion consensus with net sales rising 1.9% to $52.6 billion and membership fee revenue up 6.1% YoY to $1.0 billion, roughly 2% of company revenue.

Comparable sales, excluding impacts from changes in gasoline prices and foreign exchange, rose +3.5% for the quarter with US adjusted comps of +1.8%, Canada +7.4%, Other International +8.4%, and e-commerce comps of -9.0%. 

Exiting the quarter, Costco operated 853 warehouses and targets expanding that footprint further in the current quarter. Management, however, reiterated now is not the time to boost membership prices.

We continue to think this will happen eventually, and even a modest price increase spread across the company's membership base that totaled 69.1 paid household members and 124.7 million cardholders, both up approximately 7% versus a year ago. Costco also had 31.3 million paid executive members, an increase of 681,000 during the period. 

We also have to point out the other positive of Costco's membership business model, one that helps it stand out against other retailers - its membership fee revenue stream. That high-margin business accounted for nearly 60% of Costco's income before taxes during the quarter, and prospects for its continued increase put Costco in a very different position vs. other retailers. We like the consistency that differentiator brings to the company. 

With consumers becoming increasingly more selective in their spending, we see them leaning further into Costco's offering while membership fee revenue rises as more stores are added. We continue to feel very good about our $575 price target.


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