Loyal Customers Help Costco Win Market Share

Customers shop at a Costco store.
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Customers shop at a Costco store.

Retailer Costco Wholesale reported a higher-than-expected quarterly profit on Tuesday, boosted by a rise in membership fees and market share gains.

Shares of the largest U.S. warehouse club operator rose 1.5 percent to $103.90 in pre-market trading.

Members pay up to $110 per year to shop at Costco's cavernous stores and website, which sell items ranging from dog food to diamond rings. The fee revenue pads the bottom line, allowing the company to offer low prices and take in thin profit margins on products it sells.

"The retailer's ability to keep members engaged and coming back for more is unparalleled," Planet Retail analyst Sandy Skrovan said, adding that Costco was outperforming its peers in terms of sales growth and productivity.

(Read More: Tiffany Sues Costco Over Engagement Ring Sales)

Costco, which competes with BJ's Wholesale Club and Wal-Mart Stores' Sam's Club chain, is willing to take a hit on margins to keep prices low so shoppers visit its stores more often. It offers everyday items like bananas below supermarket prices, hoping customers will stock up on other goods as well.

Janney Capital Markets analyst David Strasser maintained his "buy" rating on Costco shares, saying the company remained one of the most predictable retailers, with strong traffic growth and operating trends.

"The machine, known as Costco, continues to gain market share and square footage growth," Strasser said.

The company's net income rose to $547 million, or $1.24 a share in the second quarter ended on Feb. 17 from $394 million, or 90 cents a share, a year earlier.

Excluding a tax benefit from a special cash dividend, Costco earned $1.10 a share, beating the analysts' average estimate of $1.06, according to Thomson Reuters I/B/E/S.

Sales rose 8 percent to $24.34 billion, while membership fees rose 15 percent to $528 million.

The Issaquah, Wash.-based company raised fees for most U.S. and Canadian members by 10 percent on Nov. 1, 2011. It previously said the fee increase seemed to have little to no effect on renewal rates.