Costco Wholesale ( COST ) has announced its first membership fee increase in seven years, raising the annual cost by $5 to $65, effective September 1. Jefferies senior vice president of equity research Corey Tarlowe provides insight into this development.
Tarlowe sees the membership fee increase as “a positive” for Costco, given the company’s business model. He explains that most of Costco’s profits are derived from membership fees rather than product sales. “We think this is accretive to Costco’s bottom line and should help drive further earnings growth going forward,” notes Tarlowe.
Addressing the timing of Costco’s membership growth and the length between the last increases, Tarlowe says, “We’re in a little 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 have been earlier, didn’t seem quite right in that normal historical cadence. “
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This post was written by Angel Smith
Video Transcript
Costco is raising membership fees for the first time in seven years, the company announced it will raise its fees by five dollars to $65 a year effective.
September 1, shares move lower on the news by only about 3%.
By joining us.
Now to discuss, we want to bring Coy.
Tw, he’s Je, he’s a senior vice president of Equity Research.
Corey, it’s good to see you again.
So it may come as a bit of a surprise to some that we’re seeing some pressure on stocks today.
I’m curious how you’re looking at this, uh, increase that we’re seeing in membership fees and ultimately whether or not that’s going to be a catalyst here for stocks.
So we think that’s definitely a positive, and the reason is that this is a $250 billion business that makes virtually no money on the products that it sells.
So where does it make its money from memberships?
Um These memberships are high margin, recurring revenue with over 90% renewal rates and have increased membership rates consistently over the past four decades since it was founded in 1983.
This is the eighth price increase we have seen in membership in the last 40 years.
And over that time period, they have seen no measurable, meaningful impact on membership renewal rates and membership behavior.
So we think this is a boost to Costco’s bottom line and should help drive further earnings growth going forward.
Did they wait too long?
So the historical cadence has been about five years.
Um For the Costco membership price increase, the thought after the first increase inc or the last increase we saw in 2017 was that this would come around the second half of 2022.
Now, because of all the hype about COVID and inflation, it just seemed a little off-color, I think I would raise the um rate at a time when inflation was running at historically high rates.
And so now I think we’re in a little different time here.
Costco’s value proposition is better than it’s ever been.
Inflation has been essentially zero for the past three quarters in business.
And so, and just as a point of reference, the average basket at Costco is $100 and $60 and the savings you get as a Costco member.
Relatively traditional retail when shopping 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, just didn’t seem right.
Uh In that normal historical cadence corey do you think we might see bjs or some of the other competitors out there?
Do a similar type of movement?
So we’ve already seen Sam’s Club raise membership fees.
Uh And that was about a year and a half ago.
Um The, Sam’s Club has not raised its membership rate, part of the last increase in about nine years.
So I suspect that Sam’s Club will raise the membership fee again as a result of Costco’s membership fee increase.
But BJ’s is the one we could see.
Act now, we recently hosted the company on Nantucket.
Um So in our consumer conference a few weeks ago, um and that, it’s something you can think about as a potential catalyst, but it doesn’t seem like it should be imminent for the company.
Um BJ’s is doing pretty well.
Traffic is heavy.
Uh They’re doing well, on the fresh side and, and the food side and the other side and the general commercial side continues to improve.
So there’s, it’s not necessarily a need for them to do that, but they can.