Rising Memberships Could Help Costco Offset a Spending Slowdown

Costco (COST) will likely report solid earnings growth in the high single digits when it reports earnings on Thursday, as rising memberships and sustained customer loyalty could help the wholesaler offset weakness in discretionary spending and ecommerce.

Net income (NI) is projected at $1.46 billion, up 7.6% from the same quarter last year, according to estimates compiled by Visible Alpha, with per share earnings forecast at $3.30. Revenues likely rose 4.2% from the year-ago quarter to $54.81 billion, dragged down by slower growth in U.S. comparable store sales, which rose just 2.3%—the slowest annual pace in more than six years. Costco reports its fiscal third quarter earnings on Thursday, May 25 after markets close.

Key Metrics

Costco’s growth in recent years has been driven by effective price management, rising memberships, and greater penetration of the company’s e-commerce platform, the latter of which surged during the pandemic. Total memberships, combining executive, business, and gold star cardholders, probably rose to almost 68.4 million, up 6.2% from the same period last year.

However, growth has slowed in recent quarters as persistently high inflation and rising interest rates strain household budgets, with sales of the company’s discretionary items such as TVs and refrigerators most adversely impacted.

The effect of slowing sales has been even greater on the company’s e-commerce business, where revenue likely fell 6.4% from a year ago, versus annual growth of 7.4% in the same quarter last year. It’s a stark reversal from the onset of the pandemic, when e-commerce sales more than doubled on an annual basis in the fourth quarter of 2020.

Despite the slowdown, the wholesaler maintains a loyal customer base, which could allow it better withstand economic headwinds relative to competitors. At the same time, sales of certain categories of products likely held up as consumers shifted their spending habits. Sales of food and beverages, and fuel at the company’s gas stations were likely robust as consumers spent more of their income on necessities.

Costco shares are up just over 8% so far this year, underperforming the broader consumer discretionary sector, which is up 18% over the same period.