ugh to cheer Costco’s bean counters, the travel business chalked up a record volume of bookings on Cyber Monday, beat that record again the day after, and in the five days after Thanksgiving reeled in $100 million worth. Meanwhile, the company has a firm handle on the tariff impact, which remains a simmering topic for investors, though it has gone somewhat to the back burner. CFO Gary Millerchip explained on the company’s December 11 conference call that Costco’s strategy for dealing with tariffs revolved around rearranging the deck chairs: shifting source countries for selected items, sourcing more in the US, and “leaning more into Kirkland Signature, where we have more control over the supply chain”. First fiscal quarter revenues up strongly The Thanksgiving and post-Thanksgiving festivities came after Costco’s first fiscal quarter had wrapped up on November 23. Even so, the company generated revenue of US$67.3 billion in the quarter, an increase of 8.3 per cent year over year. The revenues consisted of US$66.0 billion in sales (up 8.2 per cent) and US$1.3 billion in membership revenues (up 14.0 per cent). Traffic and average ticket both increased by just over 3 per cent. House brand Kirkland Signature, which just passed its 30th anniversary, enjoyed sales growth faster than overall sales, thanks partly to a 15-20 per cent price advantage over comparable national brands and, to a lesser extent, to an expanded range. In the usual Costco style, CFO Millerchip wasn’t above sharing nitty-gritty details: chicken pot pies, whipping cream, walnuts and bacon were among the items with price reductions, while new items in the Kirkland Signature range included face towels, tomato basil soup and caramelised blueberry croissants. Same-store sales stay on course Adjusted for fluctuations in gasoline prices and foreign exchange rates, total company same-store sales increased by 6.4 per cent, broadly consistent with the trend for previous quarters. The US and Canada clubs experienced same-store sales growth of 5.9 per cent and 9.0 per cent, respectively; international (excluding Canada) was up 9.0 per cent; and e-commerce blew past another milestone, increasing by 20.5 per cent. Site traffic grew by 24 per cent and order value by 13 per cent. The leading e-commerce categories included pharmacy, gold/jewellery, tyres, apparel and small electronics. After-tax profit for the quarter was US$2.0 billion, an increase of 11.3 per cent. The gross margin percentage rose slightly to 11.3 per cent. Member income: keeping an eye on the renewal rate Costco ended the quarter with 81.4 million paid members worldwide, with a global renewal rate hovering around 90 per cent, slightly higher in the US. The membership fee increase in the US and Canada, which took effect in September, has continued to positively impact total member income. CFO Gary Millerchip said the fee increase accounted for about half of the US$163 million increase in member income during the quarter. The company is paying close attention to targeting communications to members on the cusp of making the renewal decision to shore up the renewal rate. This greater focus on communication is driven by compelling motivation: more new members are signing up digitally, and they tend to be younger than the average member. They also tend not to renew at as high a rate. Costco recently added an extra daily shopping hour for its executive members and extra shopping time on Saturday for all members, which CEO Ron Vachris estimated earlier and reiterated on the December 11 call, has probably increased sales by roughly 1 per cent, while at the same time evening out traffic over the course of a day to improve the shopping experience. As it stands, executive members account for just under three-quarters of Costco’s sales. More creativity in the real estate department Over the course of the first quarter, Costco opened eight (net) new warehouses, bringing its total store fleet to 921 member warehouses, of which 633 are in the US, 112 in Canada, and 176 are located outside the US and Canada, including 78 in Japan, Korea, Taiwan and China. By the end of this fiscal year, it is targeting another 21 net new stores, all but two of which will be in the US and Canada. The company sees further opportunities for expansion, both domestically and overseas, and plans to open approximately 30 net new stores annually over the next few years. The company’s real estate team has been increased to manage all the expansion activity. CEO Ron Vachris said that expansion opportunities are being broadened because the company is getting more ‘creative’ with its real estate models: recently, it has been able to convert former hypermarket and home-improvement boxes into new Costco stores, an approach that reduces construction and fit-out costs and will be replicated going forward. Another aspect of real estate activity is the relocation of high-volume stores to bigger buildings with more parking. Five such relocations are planned for this fiscal year. The proof of the real estate pudding is, as always, in the sales outcomes, and management is chuffed that the newest Costco warehouses are generating an annualised average of US$190 million, versus around US$150 million previously. The infill store strategy is working. Outside the US, Costco’s openings are continuing at a very measured pace, with greater and more variable hurdles in regulatory processes among the reasons for the slow expansion rate. It is looking at markets outside of those where it already has a foothold, although in some it would face stiff competition from incumbents. Further reading: Some businesses do well in uncertain times. Costco should be one of them