"Even though this positive news [membership fee increase] was outweighed by disappointing earnings results in the second quarter, nothing has changed in our stance toward this important development and we continue to expect it to contribute $0.30 to fiscal year 2018 earnings per share on a standalone basis," says Instinet analyst Jessica Schoen Mace. The analyst warns giddy Costco investors that fee increases typically take two years to full reflect on the bottom line as members are charged the new rate once their membership comes up for renewal.
Mace isn't alone in her bullishness on the higher fee-driven profit lift for Costco. "We estimate an incremental $265 million of EBIT [earnings before interest and taxes] to be recognized over two years, which represents about 40 cents to earnings per share," points out Morgan Stanley analyst Simeon Gutman. Like Mace, Gutman offers a dose of caution to Costco bulls, saying the wholesaler may choose to invest a good chunk of its new revenue stream in lowering prices for members.
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On Thursday, the wholesale retailer said it would hike the price of its Goldstar membership by $5 per year to $60. Executive membership fees will increase by $10 to $120. The new fee increases will go into effect June 1, 2017, and will impact nearly 35 million members.
Anyone mildly associated with the Costco story should have seen this one coming from miles away.
While hesitant to come right out and say it would raise membership dues, Costco executives gave several strong signals last year that an increase loomed large. In late September, the company raised annual membership fees by 10% in Taiwan, Korea, Japan, Mexico and the U.K.
Costco stands to rake in even more money
"We can't say anything or give any direction on it [U.S. and Canada fee increase] other than every five or six years, we have done something," Costco CFO Richard Galanti explained on a Sept. 29 conference call. "I think the exact fifth anniversary of the last increase would be this January, and the sixth anniversary will be the following January -- We haven't made any decisions yet, and we haven't talked about it a lot internally," Galanti added.
Galanti told analysts in December the company would be "more likely to want to do" a fee increase if same-store were a "little weaker", but that no decision on a fee increase has been made. Well, with same-store sales softening in the most recent quarter and into February, it looks like Costco has decided the time is right to try and boost sales via more expensive membership dues.
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Costco's last fee increase in the U.S. and Canada was 10%, which went into effect Nov. 1, 2011. At the time, Costco hadn't raised dues for about five years.
To be sure, Wall Street has been banking on Costco lifting its membership fees and seeing its bottom line get a badly needed jolt. Costco's stock has outperformed the S&P 500 by nearly double, or up 10.9%, year to date. During the same period, the SPDR S&P Retail ETF (XRT) - Get Report dipped by 0.8%. Shares have hovered around an all-time high.
The wildcard to any profit boost is whether customers now give up their Costco membership and head to rivals. Costco is now by a wide margin the most expensive warehouse club membership card to renew each year.
Walmart's (WMT) - Get Report Sam's Club charges $100 for its rewards-based membership, and $45 for its basic membership. Becoming a member to BJ's Wholesale rewards program costs $100, with a basic membership of $50.
Editor's Pick originally published Mar. 3