It was the announcement investors had been waiting for. Last week, Costco Wholesale (COST +1.11%) finally said that it would raise its membership fee by $5 starting Sept. 1.
That increase isn't likely to affect members. But $5 extra for every single one of Costco's tens of millions of members is a lot of money for the company. Let's see how much, and why investors are greeting this news so enthusiastically.
Why raise it now?
Costco last raised its fee in 2017, also by $5. In the past, it has raised it every five years on average. Analysts have been bugging management about when the next fee hike would happen since a bit before the five-year mark in 2022.
Management has given more or less the same response every time, which is something along the lines of "We'll do it when the time is right," "It's an arrow in our quiver," "You'll be the first to know," and "It's not a question of if, but when."
Former chief financial officer Richard Galanti gave more detail last year, saying, "Our view right now is that we've got enough leverage out there to drive business, and we feel that it's incumbent upon us to be that beacon of light to our members in terms of holding them for right now."
There are signals of moderating inflation, and Costco's strong operating results over the past few quarters suggest that its membership base is in a better position right now and can handle the bump in renewal fees. And management has also said that the extra income is all about adding more value for shoppers by creating the flexibility to drive prices even lower and provide better service for customers.
Let's do the math
At the end of the 2024 fiscal third quarter (ended May 12), Costco has 74.5 million paid household members, which includes 133.9 million cardholders and 34.5 million executive memberships. Executive members, who pay $120 annually, are going to see their fees go up by $10 (the same 8% as basic members) to $130. The company added more than 660,000 executive members in the third quarter.
With the fee going up on Sept. 1, by the time Costco sees its first round of higher fees, another two quarters will have passed. Let's imagine that based on third-quarter add-ons, in another two quarters, Costco will have another million or so executive members, for a total of 35.5 million. Multiplying the $10 annual price boost by the executive member count, that's an extra $355 million annually in executive member fees. In just the first quarter of 2024, it added nearly 1 million new executive members, so that hypothetical member count could be low.
NASDAQ: COST
Key Data Points
The other current 99.4 million cardholders are basic members paying $60 right now annually. Cardholders increased by 7.4% year over year in the third quarter. As a thought experiment, adding another 7.4% to the non-executive members, which were 96.3 million in the first quarter, is about 103 million. That adds an extra $515 million in annual membership fees. In total, the fee increase could add almost $1 billion for the full year.
Another way to look at it is the increase in fee income. In the 2024 first quarter, fee income was $1.1 billion. Assuming an 8% growth rate, in line with the third-quarter year-over-year increase, the fee income could rise to approximately $1.19 billion by the 2025 first quarter. Adding another 8% from the membership fee increase, fee income could further increase to about $1.28 billion. This projection shows how the combined effects of membership growth and the fee hike could significantly boost Costco's revenue.
Where will investors see the increases?
Costco records membership fees as part of revenue, so it will show up as $100 million in added revenue. However, it comes with few additional operating expenses, so it will mostly pass through to the bottom line.
Here's how it looked in the third quarter: Total revenue was $58.5 billion, of which $1.1 billion was membership fees. Merchandise costs were $51.2 billion, which is why Costco has a razor-thin gross margin -- on purpose. Selling, general and administrative expenses were $5.1 billion, and after taking off interest and taxes, Costco was left with $1.6 billion in net income.
Management says it will use the income to upgrade its services and make Costco an even more competitive retail player. It's looking to create more value for shoppers, increase renewal rates, and drive higher sales.
In any case, it should be a hefty addition to its income, which will raise its earnings per share (EPS) and lead to a lower price-to-earnings ratio -- unless Costco stock continues to climb, which investors won't mind, anyway.
