After Costco Wholesale (COST) reported fiscal third-quarter earnings that beat analysts' estimates, executives joined the company's earnings call Thursday to discuss its membership pricing, digital sales growth, its recently expanded partnership with Uber (UBER), and how lowering prices has affected discretionary spending, among other things.
Thursday's call was also notably the first under new CFO Gary Millerchip, a former Kroger (KR) CFO who took over for Richard Galanti in March.
Still a Matter of 'When, Not if' Membership Prices Will Rise
For another consecutive quarter, Costco said it is holding its membership prices steady, though Millerchip repeated Galanti's long-used line that it's still a matter of "when, not if" the retailer raises membership prices.
Through much of Costco's history, the company raised its membership prices every five years on average, and it's now been nearly seven years since its last price hike.
Costco's two membership tiers are currently $60 and $120. The company has said in recent quarters that with strong renewal rates and overall membership numbers, leadership hasn't felt the need to adjust membership prices and risk negatively affecting those numbers. Costco had 74.5 million members at the end of the third quarter, up from 73.4 million last quarter, 69.1 million at this time last year, and about a million more than analysts had expected.
Costco CEO Ron Vachris said Thursday that while a price increase may seem unnecessary given how healthy the business is, an incremental bump would give Costco a cushion of additional revenue that could allow them to lower prices on products across the store, saving customers money over time.
"That's one of the key parts that we use that money for is that it allows us to broaden that distance from the competition and bring greater values and improving our operation overall for the member," Vachris said.
Lowering Prices To Boost Discretionary Spending
Like a number of other retailers in recent weeks like Target (TGT), Walgreens (WBA), and Walmart (WMT), Millerchip said Costco has lowered prices over the quarter, and plans to continue doing so. One of the key elements of Costco's value proposition is the lower average cost per item when it comes to buying in bulk, so lowering prices even further could drive sales up even more.
As Costco has lowered prices and inflation has slowed, Millerchip also said the company has seen increases in discretionary spending in the quarter, at a time when many of America's largest retailers have seen a decline in discretionary spending.
Target and Walmart noted a pullback in discretionary spending in their recent earnings reports as inflation influenced customers' habits, but Millerchip and Vachris said Costco's value and unique deals have given way to more discretionary spending and a larger market share.
Emphasis on Digital Growth, Uber Eats Partnership
Costco has worked to catch up digitally after historically being slow to adapt to certain trends like online shopping, with its efforts paying off as e-commerce sales grew 20.7% in the quarter compared to the same period a year ago.
The retailer has expanded certain programs like buying products online and picking them up in-store, as well as its partnerships with tech companies like Instacart (CART) and Uber. Costco has had a yearslong partnership with Instacart to offer grocery delivery to customers, and it recently expanded its partnership with Uber.
Previously, Uber Eats delivered Costco products in test markets around Texas, but the partnership recently expanded to 17 states in the U.S. and all of its Canadian locations, with plans to continue expanding across the U.S. and Costco's other international markets, Millerchip said.
Runway for Growth in Opening More US, International Stores
Costco opened a pair of new locations in the U.S. in the quarter as well as two more since the quarter ended, with plans to open a total of 12 more in the fourth quarter of 2024, with nine new locations planned in the U.S. along with two in Japan and one in South Korea. Meeting those opening schedules would mean a total of 29 new locations in the fiscal year, and Millerchip said he believes a range of 25 to 30 new locations per year is a reasonable expectation going forward.
Millerchip said during Thursday's call that the company still sees "significant runway" to continue growing by opening stores across the U.S. and internationally, and believes they will be able to do so without "cannibalizing" too many members from nearby locations when opening new stores.
"It is creating capacity for our members that are shopping very busy warehouses today, to be able to shop more frequently and drive more engagement with us and also it increases membership renewal rates over time," Millerchip said.
Costco shares were 1.5% lower at $803 in extended trading as of 8 p.m. ET Thursday following the company's earnings call.
