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Warehouse retailer Costco (NASDAQ:COST) reported a strong fourth quarter Wednesday morning. Revenue surged 14% year-over-year to $32.2 billion, just a touch short of consensus estimates. Earnings increased 29% thanks to a 10% increase in membership fees, as well as continued membership growth, resulting in a higher than anticipated $1.39 per share.

Excluding the impact of foreign exchange rates and gasoline disinflation, same-store sales grew 6% in the US and 7% internationally. Consumers continue to flock toward the warehouse retailer as income growth remains stagnant, and Costco follows Wal-Mart (NYSE:WMT) in price leadership. As a result, gross margins were roughly flat year-over-year at 10.5%. Nevertheless, profitability gains were driven by membership fee revenue, which increased 17.6% year-over-year, as well as SG&A, which fell 200 basis points as a percentage of sales to 9.4%.

We're not surprised by Costco's continued success, as it aligns perfectly with current American consumption trends. Americans are now living in bigger houses, leading to more storage room, so consumers can accumulate larger inventories of food and household goods, which Costco specializes in. Additionally, Costco offers gas for below-market rates, which is perfect for Americans who drive SUVs to haul off bulk goods in ever-more spread out communities.

Though we don't see much room for margin expansion at the retailer, we wouldn't be surprised to see membership fees increase gradually with little to no resistance. Even after price increases, retention rates ran at 89.7% in the US and Canada during the fourth quarter and 86.4% worldwide.

Whether wage growth remains sluggish or the broader economic conditions improve matters little to the long-term picture at Costco, in our view. While we remain somewhat cautious on the firm's European prospects, the firm's business model is nicely aligned with secular trends in the US. We're also big fans of the firm's dividend-growth potential as we outline in this article here. Regardless, shares are fairly valued at this juncture, scoring just a 5 on the Valuentum Buying Index (our stock-selection methodology), so we won't be adding shares to the portfolio of our Best Ideas Newsletter anytime soon.

Source: Costco Reports Fantastic Results, Still Like Its Dividend Growth Potential