Costco’s membership hike a ‘positive’ for investors: Analyst

Costco Wholesale (COST) has announced its first membership fee increase in seven years, raising the annual cost by $5 to $65, effective September 1st. Jefferies senior vice president of equity research, Corey Tarlowe, offers insights into this development.

Tarlowe views the membership fee hike as “a positive” for Costco, given the company’s business model. He explains that the majority of Costco’s profits stem from membership fees rather than product sales. “We think this is incrementality to Costco’s bottom line and should help drive further earnings growth ahead,” Tarlowe notes.

Addressing the timing of Costco’s membership increase and the length between the last hike, Tarlowe states: “We’re in a bit of a different time here. The value proposition that Costco has is better than it’s ever been. Inflation has been essentially zero for the last three quarters in the business,” he told Yahoo Finance. He adds, “So the savings are there, the value is there, and the timing, while it could’ve been earlier, didn’t quite seem right at that normal historical cadence.”

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This post was written by Angel Smith

Video Transcript

Costco is hiking its membership fees for the first time in seven years, the company announced it’s raising its fees by five bucks to $65 a year that goes into effect.

September 1st, the stock moving lower on the news off just about 3%.

Joining us.

Now to discuss, we want to bring in Coy.

Tw, he’s Je, he’s a senior vice president of equity Research.

Corey, it’s great to see you again.

So it might be a little bit surprising to some that we are seeing some pressure on the stock today.

I’m curious how you’re viewing this, uh, hike that we’re seeing in membership fees and ultimately whether or not this is going to be a catalyst here for the stock.

So we think it’s certainly a positive and the reason is, is that this is a $250 billion business roughly that virtually makes no money on the products that it sells.

So, where does it make its money on the memberships?

Um These memberships are high margin, recurring revenue streams with over 90% renewal rates and has raised membership rates continually over the last four decades since it was founded in 1983.

This is the eighth price increase that we’ve seen on membership in the last 40 years.

And over that time frame, they’ve seen no measurable, significant impact on membership renewal rates and membership behavior.

So we think this is incremental to Costco’s bottom line and should help drive further earnings growth ahead.

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Did they wait too long?

T so the historical cadence has been about five years.

Um For Costco’s price increases on, on membership, the thought was after the first inc increase or the latest increase that we saw in 2017 was that this would come in about the latter half of 2022.

Now, because of all the noise around COVID and inflation, it just seemed a bit off color, I think to raise the rate um at a time when inflation was running at historically elevated rates.

And so now I think we’re in a bit of a different time here.

The value proposition that Costco has is better than it’s ever been.

Inflation has been essentially zero for the last three quarters in the business.

And so, and just as, as a point of reference, the average basket at Costco is 100 and $60 and the savings that you get as a Costco member.

Relative traditional retail when you shop at Costco is $60 on a $160 basket.

So the savings are there, the value is there and the timing while it could have been earlier, didn’t quite seem right.

Uh At that normal historical cadence, Corey, do you think we could see bjs or some of the other competitors out there?

Do a similar type of move?

So we already saw Sam’s Club raise its membership fees.

Uh And that was about a year and a half ago.

Um The, the Sam’s Club hasn’t raised its membership rate, part of the last increase um in about nine years.

So I doubt that Sam’s Club is going to be raising its membership fee again as a result of Costco raising its membership fee.

Um But B J’s is one that we could see.

Um act now, we recently hosted the company in Nantucket.

Um So at our consumer conference a couple of weeks ago, um and it, it is something that you could think about as a potential catalyst, but it doesn’t really seem like it needs to be imminent for the company.

Um B J’s is, is doing quite well.

Traffic is strong.

Uh They’re doing well on, on the fresh side and, and the food and sundry side and on the general merchant side continues to improve.

So there’s, there’s really not a necessarily a need for them to do it, but they could.