Costco Wholesale (COST 2.00%) is one of the more expensive retail stocks you can buy. It trades at a price-to-earnings multiple north of 50 and its market cap is $370 billion. In just five years, the shares have soared by 200%. While Costco has a great business, the biggest reason to not invest in the company today is its high valuation.
But investors shouldn't count out this stock in either the short or long term. Costco has many levers it can pull on to drive more growth for its business, and it just used one of them: raising the price of its memberships.
Costco increases its membership fees for the first time in seven years
Normally, Costco announces a membership price hike every five or six years. But perhaps due to rising inflation, it didn't want to simply join the long list of companies increasing their prices and it waited a little longer before raising its member fees once again.
On July 10, the company announced it would be lifting its member fees for the first time in seven years. There will be a $5 increase for its gold star and business members, and a $10 increase for executive members. That amounts to an 8.3% boost based on the current fees.
A price hike is good news for investors
Costco's memberships allow the company to target leaner margins on products, because it can count on revenue from memberships to help pad its top line.
In the company's most recent quarter, which ended on May 12, membership fees contributed $1.1 billion to Costco's overall revenue of $58.5 billion. While that's just a modest 1.9% of the top line, it's a significant item when you consider that Costco's net income was less than $1.7 billion for the period. Without those membership fees, the company's margins would be a lot worse, its profit would be lower, and its earnings multiple would also be higher -- making the stock appear even more overvalued.
Analysts have been boosting their price targets for Costco's stock since it announced the fee change. And there could be more upgrades to come, particularly after the company reports its latest round of earnings numbers in September and management updates its outlook to account for the increase in member fees.
Costco's growth rate could use some help
Over the years, Costco's business has been able to expand even amid challenging economic conditions. But while the growth rate has remained better than average in retail, it has been slowing.
COST Revenue (Quarterly YoY Growth) data by YCharts
The benefit of a membership hike is it will help give the company's financials a boost, providing the business with a bit of a buffer in case the revenue growth rate slows in future quarters.
Why Costco's stock could hit $1,000
Costco's stock is down 1% in the past month. It seem the news of an increase in its membership fees hasn't resulted in a huge wave of bullishness, but that could change. After the company releases its next earnings report in September and potentially updates its guidance to reflect the rising prices, investors may once again rally around the stock.
Plus, the membership hike could put the company in a great position to potentially announce another special dividend this year. While Costco's 0.6% dividend yield may look underwhelming, the company has rewarded its investors through multiple special dividend payments in the past. News of another special dividend this year could be yet another catalyst to send the shares higher, on top of a possibly strong earnings report in a few months.
Together, these factors could help send the stock price to $1,000 this year.
Costco is a top stock to buy and hold
Costco's stock isn't cheap, but odds are it won't get down to a 20 or 30 times earnings multiple unless something goes drastically wrong for the business. And instead of trying to wait for that to happen, you're likely better off just buying and holding the retail stock.
It looks to be in a good position to rally in the latter half of the year and possibly hit the $1,000 mark, but even if it doesn't, it may only be just a matter of time before that happens. Costco is a fantastic business to invest in, and with many growth opportunities, it's an easy stock to justify putting in your portfolio for the long haul.
