4 Key Takeaways from Costco’s Earnings Call

After Costco Wholesale ( COST ) reported fiscal third-quarter earnings that topped analyst estimates, executives joined the company’s earnings call on Thursday to discuss membership pricing, digital sales growth, its recently expanded partnership with Uber ( UBER) and the impact of price cuts impacted, among other things, discretionary spending.

Thursday’s call was also the first under new CFO Gary Millerchip, the former Kroger (KR) CFO who succeeded Richard Galanti in March.

It’s still a matter of “when, not if” membership prices will increase

Costco says it’s keeping membership prices steady for a second straight quarter, although Millerchip echoed Galanti’s long-used sentiment that it’s still a matter of “when, not if” the retailer raises membership prices.

For most of Costco’s history, the company has raised member prices on average every five years, and it’s been almost seven years since the last price increase.

Costco’s two membership tiers are currently $60 and $120. In recent quarters, the company said that with high membership renewal rates and overall membership numbers, management did not feel the need to adjust membership pricing due to the risk that it would have a negative impact on those numbers. At the end of the third quarter, Costco had 74.5 million members, up from 73.4 million in the previous quarter, 69.1 million at this time last year, or about a million more than analysts expected.

Costco CEO Ron Vachris said Thursday that while the price increase may seem unnecessary given the company’s strong health, a gradual increase would provide Costco with a cushion of additional revenue that could allow the company to lower product prices across the store, saving customers money over time.

“One of the key parts of what we’re putting this money towards is that it allows us to increase our distance from the competition and bring more value and overall make our experience better for the member,” Vachris said.

Lowering prices to increase discretionary spending

Like many other retailers such as Target (TGT), Walgreens (WBA) and Walmart (WMT), Millerchip said Costco lowered prices during the quarter and plans to continue doing so. One of the key elements of Costco’s value proposition is its lower average cost per item when purchasing in bulk, so lowering prices further could boost sales even further.

As Costco lowered prices and inflation slowed, Millerchip also said the company saw an increase in discretionary spending this quarter, at a time when many of the largest U.S. retailers saw declines in discretionary spending.

Target and Walmart saw a reduction in discretionary spending in their latest earnings reports as inflation affected customer habits, but Millerchip and Vachris say Costco’s value and unique offerings have given way to more discretionary spending and greater market share.

Emphasis on digital development, partnership with Uber Eats

Costco has been working to catch up in the digital marketplace after being historically slow to adapt to some trends like online shopping, and those efforts paid off as e-commerce sales increased 20.7% this quarter compared to the same period last year ago.

The retailer has expanded some programs like buy online and pick up in store, as well as partnerships with tech companies like Instacart (CART) and Uber. Costco has partnered with Instacart to offer grocery delivery to customers for years and recently expanded its partnership with Uber.

Previously, Uber Eats delivered Costco products to test markets across Texas, but the partnership recently expanded to 17 U.S. states and all Canadian locations, with plans to expand further into the U.S. and other Costco international markets, Millerchip said.

Runway for growth in store openings in the U.S. and abroad

Costco opened two new U.S. locations this quarter, as well as two more since the end of the quarter, with plans to open a total of 12 more in the fourth quarter of 2024, with nine new U.S. locations planned, plus two in Japan and one in Korea South. Meeting the opening schedule would mean opening a total of 29 new locations in the fiscal year, and Millerchip said it believes a reasonable future projection is 25 to 30 new locations per year.

On Thursday’s earnings call, Millerchip said the company still sees “significant runway” in continuing to expand by opening stores across the U.S. and abroad, and believes it will be able to do so without “cannibalizing” too many members from nearby locations during opening new stores.

“This creates opportunities for our members who currently shop in very crowded warehouses to shop more frequently and increase engagement, and also increases membership renewals over time,” Millerchip said.

Costco shares fell 1.5% to $803 in extended trading as of 8 p.m. EST on Thursday after the company’s earnings announcement.