On Thursday night, Costco Wholesale (COST) announced fiscal third quarter results that were nothing short of terrific with clear signs that it continues to gain consumer wallet share, membership renewals continue to improve and that new plans aim to expand its warehouse footprint. Overall, it was a strong quarter, however, shares are more than likely trading Friday morning because the company has elected to put a planned increase in the price of memberships on hold for the time being. We’ll cover that in more detail below, but given expectations as we reach the fifth anniversary of the last membership price increase, some are not happy and we suspect others will need to adjust their models to account. of which probably a later than expected increase in membership fees.

We recently added to portfolio COST position, and if the current position size weren’t so large, we’d use today’s pullback to add even more after the quarterly results. With COST stocks still well below their recent highs and activity running full steam ahead, we suggest members underweight stocks use Friday’s pullback to adjust the size of their positions relative to that of the portfolio. . We continue to rate COST stock at one and our long-term price target remains $620.

Now let’s move on to the results for the quarter…

Costco’s May quarter results beat consensus expectations, led by the company’s total comparable sales, which, excluding the impacts of gas price and currency changes, rose 10.8 % year over year. Reported revenue was $52.6 billion for the quarter, up 16.2% from the prior year quarter, with net sales up 16.3% and expenses Membership up 9.2% year-on-year. Drilling through other key metrics, for the quarter the company’s US adjusted comparable sales were +10.7% and its e-commerce adjusted comparable sales were +7.9%. Average transaction sizes increased 7.6% globally and 10.4% in the United States. The best performing categories in the third quarter were candy, sundries, tires, toys, jewelry, newsstands, home furnishings, apparel, bakery and delicatessen. The underperforming departments were liquor, office, sporting goods and hardware, all of which were quite strong a year ago.

Membership revenue increased 9.2% year-over-year to $0.984 billion, representing 55% of the company’s operating profit in the quarter, compared to 54% in the quarter. the previous year. Membership renewal rates reached an all-time high with the renewal rate in the United States and Canada at 92.3%, up 0.3% sequentially. The global membership renewal rate increased by 0.4% quarter over quarter, reaching 90% for the first time. At the end of the quarter, the number of member households and cardholders stood at 64.4 million paying households and 116.6 million cardholders, both up by more than 6% compared to last year. one year old. We attribute this to the company’s ongoing warehouse expansion efforts, with plans to add more over the next quarter, as well as more consumers flocking to Costco to stretch their available spend. On the new warehouse front, a key driver of membership and membership fee revenue, Costco reaffirmed plans to add a total of 24 net new locations, indicating another 10 locations in the current quarter. The additional units added during the May quarter, as well as those targeted for the current one, as well as the continued expansion of the company’s footprint bode well for dues revenue which will continue to grow over the next quarters.

On the subject of raising its dues, which it typically does every 5-6 years, Costco had nothing new to announce, sharing that given the current environment, it’s not not the right time. However, as the company approaches the 5.5 year mark, there will be more internal conversations. This suggests to us that there will be a possible price increase in the first half of 2023, as consumers do not feel as much inflationary pressure. While some will be disappointed by this lack of news, we believe Costco is doing the right thing for its members, a key driver of its earning power. If we learn of an impending increase in the price of memberships over the next few quarters, this will lead to even more favorable membership fee revenue comparisons in calendar 2023. Given the impact of this segment on the results of business, this points to another reason why Costco’s EPS in 2023 is expected to continue to climb.

Inventories were a hot topic as retailers released their quarterly results. At Costco, inventory at the end of the May quarter was up 24% year over year, but was slightly higher compared to the November and February quarters, unlike a number of other retailers. . We must also factor into the equation that at the end of the quarter, Costco operated 830 warehouse locations compared to 809 at the end of the April 2021 quarter. This suggests that the company has kept tight control over its inventory. and should not experience the same margin squeeze that other retailers are likely to experience as they seek to reduce these bloated inventories.

Costco also said it will announce its May sales results on Sunday, May 29, which means we’ll have some thoughts on those numbers when we return from Memorial Day weekend.