Costco Wholesale (COST) reported accelerating earnings growth Tuesday as membership fees offset the giant warehouse club retailer's slowing sales growth.
Earnings grew 38% to $1.24 a share, the 13th straight quarter of double-digit growth and the best gain over that span.
The EPS included a tax benefit of 14 cents a share related to a portion of the special dividend it paid in December to its 401(k) participants.
Even without that tax gain, Costco topped estimates for $1.06 a share, according to analysts polled by Thomson Reuters.
Costco rose 1% to 103.75 on the stock market Tuesday. It hit a record 105.52 intraday.
Earnings growth has ramped up even as sales growth has drifted lower. Total revenue rose 8% to $24.87 billion, matching the smallest gain over the past three years.
Costco has had so many years of strong sales growth that it's been hard to keep up the pace, says Brian Sozzi, chief equities analyst at independent research NBG Production. At the same time, overseas sales have slowed as Costco has opened more warehouses, which can cannibalize existing-store sales.
"I expect sales growth will continue to moderate as they cycle tough comparisons," Sozzi said.
Same-store sales grew a healthy 5% vs. a year earlier — 5% in the U.S. and 6% overseas.
You can thank Costco's loyal membership base for the bump in profit growth. Membership fees grew 15% to $528 million — accounting for nearly all of Q2's $547 million in net income.
Its membership fee income has been growing at a rapid clip as more members renew and new ones have joined amid an increase in the membership rate.
"Membership fee income is pure profit to Costco," Sozzi said.
Profit growth will slow in coming quarters as Costco "cycles" the rapid membership fee income growth, he predicted. Still, he says that's not a big concern since renewals remain strong. If the renewal rate were to fall, that would be a concern, he adds.
Costco has been among retailers' top performers of late. Even as other chains have seen consumers tighten their purse strings amid rising gas prices and the payroll tax hike, Costco continues to shine. Its February same-store sales rose 6% on top of an 8% rise in February 2012.
Costco's same-store sales have dramatically outperformed discount giants Wal-Mart (WMT) and Target (TGT), says Piper Jaffray analyst Sean Naughton.
The secret sauce: "Costco offers absolute pricing authority on items," said Naughton. "You buy there in bulk and you won't find things cheaper anywhere else.
That pricing authority, he adds, has helped Costco establish a long-term trust and loyalty with its customers, who pay a membership fee to shop there.
"The magic of Costco is customers go there for its unbeatable prices on staple items and then that trip turns into the customer making a large discretionary purchase," said Naughton.
Costco caters to a middle-upper-income to upper-income crowd, which hasn't been hurt as much by head winds such as the increased payroll tax as the lower-income crowd that tends to shop at many of its discount rivals.
Costco continued to strike a chord with these customers in Q2 with strong sales in items such as fresh foods like produce and meats, small appliances and home goods, Naughton says.
It's also been adding to its lineup, including an increased array of organic foods.