Costco Wholesale (Cost 0.33%) Hall is — as its name suggests — a wholesale club, more like that Walmart’s Sam’s Club or BJ’s. These businesses are undoubtedly retail operations, but they do not operate in the same way as department stores or grocery stores. And that’s an important distinction that smart investors know when they examine Costco’s results.
Here’s a closer look at the math behind this vital difference.
When a company chooses Messi’s Financial results report, they can bring traffic generated to their store. Basically, management is telling investors if more people are shopping or less people are shopping at company stores. Some stores are stickier than others. For example, look at regular weekly traffic at a grocery store, while a department store like Macy’s may be less frequent shopping trips for most consumers. Same-store sales are a fairly common statistic in the retail sector, at least in part because most stores don’t have a relationship with their customers beyond the customers who actually choose to show up and spend money.
Costco also reports comparable store sales. And the numbers have been strong of late. In fiscal 2022, which ended in August, same-store sales rose a pleasing 14.4%. However, there is another number in the mix that is equally important: members. At the end of fiscal 2022, the company had approximately 65.8 million paying family members, up 6.5% year-over-year. The tidbit was revealed during Costco’s fourth-quarter 2022 earnings conference call when management also noted that store count was up nearly 3%. So the membership growth was pretty impressive, all things considered.
Remember, customers are the ones paying for the convenience of shopping at Costco. And since they paid, they can go regularly. To keep these club members coming back, Costco works hard to keep prices low in its stores. And that’s where some possibly hideous math comes in.
In fiscal year 2022, Costco generated revenue of $226.954 billion. Of this, merchandise sales accounted for $222.73 billion, or about 98%. The remaining two percent or more are club fees, accounting for $4.224 billion. In most cases, that would be a figure that investors could safely pay only passing attention to, but not at Costco.
That’s because just ahead of the income statement, you’ll see that the value of goods sold was $199.382 billion. and selling, general and administrative expenses totaling $19.779 billion. Put them together, and you get $219.161 billion, which is effectively the cost of running the company’s retail operations. Using back-of-the-envelope math, Company Stores generated about $3.569 billion in pre-tax profit excluding “other” items.
This is where the story gets really interesting. The company earned a pre-tax profit of $7.84 billion. Membership dues that customers pay to shop at Costco totaled $4.224 billion in fiscal year 2022. So more than half of the company’s pre-tax profits are accounted for by member fees. Membership levels, and thus membership fees, are, in some ways, more important than product sales. This is why the company is often willing to sell products at shockingly low prices, because it can afford narrow retail margins if it allows you to pay your membership dues.
Not your typical retailer
Costco competes directly with other companies, so this model is not unique. However, savvy investors know that product sales only tell part of the Costco story. If you’re not paying close attention to membership levels and membership fees, you’re missing the most important part of the picture at Costco.
Reuben Gregg Brewer has no position in the said stock. The Motley Fool has positions on and recommends Costco Wholesale and Walmart Motley Fool has a revealing policy.