Costco's (COST 2.03%) fiscal first-quarter earnings release after market close on Thursday was pretty ho-hum. Of course, this was somewhat by design. The company releases monthly sales results, giving investors frequent glimpses into the business.
In other words, they know what's coming (to an extent). It wasn't too surprising, therefore, to hear that the company's fiscal third-quarter sales rose just over 8% year over year to $53.4 billion. Earnings per share of $3.07 -- up from $2.98 in the year-ago period -- wasn't too far from analysts' consensus forecast, either.
But there was some interesting news in the update. That news came during the company's fiscal first-quarter earnings call. A membership-fee increase is coming, Costco management said.
This came shortly after Walmart announced a membership-fee increase for its Costco-like wholesale arm, Sam's Club. The Costco competitor announced membership-fee increases in August and started rolling them out in October.
NASDAQ: COST
Key Data Points
Costco is due for a membership increase soon
As usual, Costco management was quite coy with the language it used to discuss its plans for a membership-fee hike. But Costco CFO Richard Galanti did say a few important words for investors about it: "[I]t's a question of when, not if."
Even more, he said that strong membership loyalty and an improved value proposition for customers position the company well for a fee increase -- even in the face of an uncertain macroeconomic backdrop. Costco is "in a very strong competitive position right now," Galanti explained.
But when could a fee increase come? The average time between the last three increases was five years and seven months. The last increase was in June of 2017, so the next increase may be sometime around January of next year.
Galanti said that the company could easily put it off a few months if it wanted to. However, the CFO ultimately refused to offer a specific timeline.
A big catalyst
It would be difficult to overstate how important of a catalyst a membership-fee increase would be for Costco. Because the company runs on razor-thin margins, its membership-fee revenue accounts for the bulk of its net income. Fiscal 2022 membership-fee revenue, for instance, was about $4.2 billion -- equal to more than 72% of Costco's net income for the period.
In 2017, when Costco last increased its membership fees, the company's Gold Star and Executive memberships both increased by 9% -- to $60 and $120, respectively. With membership-fee revenue being virtually 100% margin, this translated directly to earnings growth. A rate hike by a similar percentage would likely, once again, convert almost entirely to earnings growth.
Of course, true to the company's mission to "provide members with quality goods and services at the lowest possible prices," Costco can then use this higher membership-fee revenue to continue improving its value proposition for customers, leading to continued loyalty, more new members, and ultimately, sales growth.
In short, a membership-fee increase is coming and will likely be here early next year. This is great news for Costco shareholders.
