Costco Rises the Most in a Year After Renewal Rates Hold Steady

(Bloomberg) -- Costco Wholesale Corp. kicked off its biggest rally in a year after its latest results signaled that customers are staying loyal in the era of Amazon.com Inc.

The company's shares surged after first-quarter earnings beat analysts' estimates. Profit is only part of the story, though: Chief Financial Officer Richard Galanti said on a conference call he was pleased that membership renewal rates remained steady after a warning last quarter that they could drop. Investors have keyed on the metric as a barometer of consumers' enthusiasm for the brand. Profit margins were also better than expected.

Costco's treasure-hunt shopping experience has so far proven resilient in the face of heightened competition from both online and brick-and-mortar peers. Comparable-store U.S. sales have risen for 14 straight months, and the company has bulked up its web operations with more products and a new click-and-collect service. That's assuaged the fears of some investors that Amazon's encroachment into categories like food, apparel and beauty products could siphon off customers.

The shares rose as much as 4.7 percent to $195.35 on Friday, marking the biggest intraday increase since September 2016. The stock has gained about 22 percent this year, compared with the 19 percent uptick for the benchmark S&P 500 Index.

“Overall, results were solid with very strong sales numbers and good margins,” Edward Jones analyst Brian Yarbrough said in a note. “We were also positive that membership renewals seem to have stabilized.”

Net income was $1.45 a share in the period ended Nov. 26, according to a statement late Thursday. Excluding a 9-cent-a-share gain from a tax benefit, profit was $1.36 a share. Analysts projected $1.34, according to the average of estimates compiled by Bloomberg. Membership renewal rates for the U.S. and Canada held at 90 percent, while gross margins were flat when excluding the impact of fuel deflation. Some analysts had predicted lower margins.

Click-and-Collect

Analysts were also encouraged by Costco's recent moves to expand its online capabilities. The retailer had been reluctant to allow customers to buy products online and pick them up in store -- a practice commonly known as click-and-collect -- but it's now offering that for laptops and jewelry. Galanti said more than half of customers who use the service also grab other items in the store.

“There are lots of incremental and highly profitable low-hanging fruit opportunities they have not moved on yet, and management now seems compelled to take advantage of them in their own way,” Bill Dreher, an analyst at Susquehanna International Group, said in a note.

The company previously disclosed sales for the period, which included an e-commerce gain of 44 percent. That should be further boosted by an expanded same-day grocery delivery offering in partnership with Instacart, which Galanti said is “growing very nicely.”

“Digital investments are resonating,” Peter Benedict, an analyst at Baird, said in a note. “Concerns over the demise of Costco's business in the face of Amazon have been overblown.”

To contact the reporter on this story: Matthew Boyle in New York at mboyle20@bloomberg.net.

To contact the editors responsible for this story: Caroline Salas Gage at csalas1@bloomberg.net, Jonathan Roeder, Nick Turner

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