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Costco Earnings Preview: Margins, Membership Fees In Focus Amid Slowing Sales

Costco may consider boosting its membership fee for the first time in more than five years as it navigates slowing autumn sales and rising inflation pressures.

Updated at 10:21 am EST

Costco Wholesale  (COST) - Get Free Report shares edged lower Thursday ahead of of the bulk discount retailer's first quarter earnings after the close of trading, with investors likely focused on plans to boost its lucrative membership fees and improving its core profit margins.

Costco is expected to post a bottom line of $3.11 per share on revenues of $54.64 billion, an 8.5% increase from the same period last year. Same store sales are forecast to rise by around 5%, according to data from Refinitiv.

Those estimates may be tested however, by a weaker-than-expected November sales tally of $19.17, a 5.7% increase from last year that was notably lower than the 7.7% pace recorded over the month of October and the 10.1% advance the group booked in September.

The late autumn slowing echoes comments Brian Cornell, CEO of big box rival Target  (TGT) - Get Free Report, who told investors on November 16 that the group saw a "change in shopping behavior in the back half of October leading into November" that he characterized as consumers "working with their budget, shopping very carefully, looking for value, and recognizing they've got to start with core staples before they spend dollars in discretionary categories."

Costco may have also suffered from the overall decline in U.S. gas prices, which have fallen more than 30% since hitting an all-time high of $5.10 per gallon earlier this summer. The gas price surge, in part, helped U.S. same-store sales rise 15.8% over the three months ending in August, Costco reported, a move many analysts put down to its offering of cheaper gas to club members.

Membership fees, in fact, rose 7.5% over the August quarter to $1.327 billion, a figure that analysts suggest could slip to $1.014 billion over the three months ending in November. CFO Richard Galanti told investors in September that there were "no specific plans regarding a fee increase at this time".

"Costco will likely be asked about timing of a membership fee increase (during this quarter's earnings conference call)," said D.A. Davidson analyst Michael Baker, who carries a 'neutral' rating with a $455 price target on the stock. 

"Costco has raised their membership fee about every 5.5 years, which would suggest an increase in early 2023," he added. "However, with consumers struggling through higher costs across the board, Costco may be reluctant to add to that pressure in the near term."

Another item in focus will be likely be Costco's famous hot dog and soda combination, which has remained pegged at $1.50 since 1985. Galanti told investors in September that certain areas of the business, including travel, "help us be more aggressive in other areas" in terms of price.

This, he suggested, means Costco can "hold the price on the hot dog and the soda a little longer. Forever."

Costco shares were marked 0.9% lower in early Thursday trading to change hands at $477.56 each, a move that would leave the stock some 2% higher over the past six months.