Costco shares surge past expectations

Costco Wholesale Corp. kicked off its biggest rally in a year after its latest results signalled 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 per cent to US$195.35 on Friday, marking the biggest intraday increase since September 2016. The stock has gained about 22 per cent this year, compared with the 19 per cent 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 US$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 US$1.36 a share. Analysts projected US$1.34, according to the average of estimates compiled by Bloomberg. Membership renewal rates for the U.S. and Canada held at 90 per cent, while gross margins were flat when excluding the impact of fuel deflation. Some analysts had predicted lower margins.

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 clickand-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.

The company previously disclosed sales for the period, which included an e-commerce gain of 44 per cent. 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.”