That number might be high -- the company does not break down exactly where its profit comes from in its earnings reports or calls. But it's fair to say that the Issaquah, Wash., warehouse-club retailer sells its merchandise at very thin margins and that membership sales drive a meaningful percentage of its profit.
Basically, Costco takes membership fees in exchange for offering its customers low prices.
"Costco doesn't actually make most of its money selling things," Investopedia reported. "It charges its members an annual fee for the privilege of shopping at its stores, and these fees represent the bulk of Costco's operating profit.
"In 2019, Costco made $3.35 billion from membership fees, an increase of 7% from the previous year. Its entire net income for the year was $3.66 billion."
That's typical of the chain's mix and margin, and that makes retaining and adding members the driving force in how investors should judge Costco's success.
How Did Costco Do With Members in Q1?
Costco has two top-line membership numbers that matter: renewals and new signups. It's also important to look at what types of memberships people are buying, but that's secondary to retention and growth.
"At first-quarter-end, our U.S. and Canada renewal rate came in at 91.6%, up 0.3% from the 12-week earlier figure at Q4-end," Chief Financial Officer Richard Galanti said during the Q1 earnings call. "The worldwide rate came in at 89%, also up 0.3% from 12 weeks ago at Q4-end."
Those numbers are in line with historical norms for the chain, with the U.S. and Canada rates coming in on the high end of what Costco normally reports.
Galanti said that renewal rates have benefited from an increase in automatic renewals "as well as increased penetration of executive members, who on average renew at a higher rate than the non-executive members."
Executive members pay twice the normal $60 membership rate but get a 2% annual reward (capped at $1,000) on eligible purchases. During company-earnings calls, Galanti has often cited the added value of executive members.
Membership growth at the warehouse club was also strong. That included significant growth in executive members.
"At Q1-end, total paid households was 62.5 million, up 800,000 from 61.7 million a quarter ago, and total cardholders 113.1 million, up 1.5 million from the 111.6 million 12 weeks ago," Galanti said.
"At Q1-end, paid executive members totaled 26.5 million, an increase of 836,000 during the 12 weeks since Q4-end."
Executive members make up 42% of Costco's members but deliver more than 70% of its sales, according to the CFO.
That's relevant because while the chain does not make much profit from what it sells, customers who often use their memberships renew at much higher rates than those who don't.
Costco Steadily Adds New Warehouses
Costco does not expand rapidly but it supports its membership growth and retention by steadily adding new locations. Opening new warehouses exposes the company to new potential customers and often gives current members more convenient locations to shop at.
"A few other items of note, in terms of warehouse expansion, as you know for fiscal 2021, we opened 22 units, including 2 [relocations], so a net increase of 20 units during fiscal 2021," Galanti said.
"And this quarter that ended a couple of weeks ago, we opened 9 units, including 1 [relocation], so net openings of 8. For the remainder of the year, we plan to open 23 new units ... 4 of which would be relocations, so a net of 19 if all goes as planned."
Costco shares are up 43% year-to-date and have more than tripled (up 239%) over the past five years.