On the surface, Costco‘s (COST 4.26%) fiscal third-quarter earnings report may have seemed disappointing. Total sales for the period rose just 1.9% year over year to $52.6 billion and earnings per share fell from $3.05 in the year-ago period to $2.93. Analysts, on average, were expecting the membership-based wholesale retailer to report revenue of $54.6 billion and earnings per share of $3.29. Yet Costco shares surged more than 4% higher on Friday as investors digested the results.

Closer scrutiny of the period’s performance reveals a healthy core operation with a growing base of loyal members and impressive bottom-line momentum (when excluding one-time items).

Understanding Costco’s business momentum

First and foremost, it’s worth noting that Costco’s core business is doing better than its reported consolidated top-line growth rate suggests. Consider that sales at stores open for more than one year (comparable sales) rose 3.5% year over year when excluding the impacts from changes in gasoline prices and foreign exchange. This rate is well ahead of the company’s 1.9% growth rate for total sales. 

Additionally, investors should note that adjusted comparable sales reaccelerated in the last full month of the quarter. April adjusted comparable sales, when adjusted for fluctuations in gasoline prices and foreign exchange, rose 4.3%. This is up from 2.6% adjusted comparable sales growth in March. 

Further, investors were likely pleased with Costco’s member metrics. Membership fee income for the quarter rose 6.1% year over year. With membership fee income outpacing net sales growth, membership fee income grew to 1.98% of sales — up from 1.91% in the year-ago quarter. Even more, management noted that membership fee income would have increased 8% year over year if it weren’t for headwinds in foreign exchange rates. Costco management also noted that its higher-end membership tier has impressive momentum, with the company adding about 57,000 paid executive members per week during the quarter. Highlighting how important these members are, they account for 45% of Costco’s paid members and 73% of worldwide sales. This momentum in membership metrics shows that Costco’s value proposition is resonating with both existing and new customers.

Impressive earnings growth

Looking beyond sales and membership metrics, it’s also worth noting that the underlying strength in Costco’s earnings power is quite good when adjusting for some one-time items. For instance, though net income fell 4% year over year on a reported basis, it actually increased 8% year over year when excluding nonrecurring items from both the current year’s fiscal third quarter and the year-ago period. Even more, this adjusted after-tax net income was up even in the face of a higher tax rate. Costco’s tax rate in the third quarter of fiscal 2023 was 26.5%, up from 24.9% in the same period last year.

International success

Finally, there’s Costco’s strong strong growth internationally. While slow comparable store sales growth in the U.S. weighed on the company’s net sales in fiscal Q3, comparable store sales in Canada and its “other international” segment rose 7.4% and 8.4% year over year, respectively, when adjusted for gas price and foreign exchange variability.

While investors should look for a reacceleration in Costco’s U.S. business, shareholders are likely counting on the company’s more nascent international operations as a key catalyst for the business over the next 10 years and beyond. Fortunately for shareholders, Costco is doing very well internationally.

Overall, a closer look at Costco’s fiscal third-quarter results shows that the underlying business is doing exceptionally well — and it’s doing it in the face of challenging year-ago comparisons and a tough macroeconomic environment.

Daniel Sparks has positions in Costco Wholesale. His clients own shares of Costco. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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