After the last three fee hikes, stock prices moved in a particular direction.
Costco (COST -0.15%) has answered investors’ biggest question. The warehouse giant last raised fees in 2017, and investors were wondering when the next increase would come. After all, the company has traditionally increased fees every five years.
Finally, earlier this month, Costco announced that it would be increasing the fees for its standard and premium memberships, effective September 1. While this is great news because increased membership revenue means more revenue for Costco, it also comes with risks: It could lead to some customers abandoning their memberships or encouraging potential new members to go elsewhere.
Now, as you consider whether this fee increase will benefit your bottom line, you might be wondering which direction Costco’s stock will take in the coming months. Will the prospect of additional revenue outweigh the risks and drive the stock higher? Let’s see what history tells us.
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Costco’s Business Model
First, it’s important to consider Costco’s business model, which has helped the company grow profitably in almost any economic environment. The company offers a wide range of general merchandise and necessities like gasoline and food at extremely low prices. It is known for maintaining its prices for rotisserie chickens at $4.99 and hot dogs at $1.50 year after year, regardless of inflationary pressures. So even in tough economic times, shoppers flock to this warehouse giant because they know they’re getting the best prices at Costco.
However, to access these great perks, customers must pay a yearly membership fee, which is a great tool for Costco because it doesn’t require a large investment to offer the membership, ensuring a steady annual revenue stream with high profit margins.
Fees also encourage members to shop as much as possible at Costco to get the most value out of their purchases, which keeps members coming back, with Costco stores in the U.S. and Canada seeing renewal rates of over 90%.
Membership fees are a significant part of Costco’s profits because, as mentioned above, they have high margins. The company made $57 billion in net sales in the most recent quarter, but its cost of goods was over $51 billion, meaning Costco isn’t making a big profit selling goods in its warehouses. Membership fees contributed over $1.1 billion to revenue this quarter.
That’s why it’s important we continue to retain and grow membership revenue, which is why the just-announced membership fee increases are big news. Costco is currently increasing the cost of its Gold Star (individual), Business and Business Add-on memberships in the U.S. and Canada by $5 to $65. The company is also increasing the cost of its Executive memberships in the U.S. and Canada by $10 to $130. This action affects 52 million members, just over half of whom are at the Executive level.
Costco’s performance after past fee hikes
Now, back to the question of how this move will affect the stock price. As mentioned above, Costco has increased its membership fees roughly every five years for the past few years. Let’s look at how the stock performed over the two years following the last three membership fee increases. These increases occurred in June 2017, November 2011, and May 2006.
Costco’s stock price has surged by double digits in each of the two years since the company raised its prices: 32% after the company’s last price increase, 43% after the 2011 price increase, and 33% after the 2006 price increase. We also know that Costco’s profits have increased steadily since 2006, so in the long run, price increases have not negatively impacted the company’s growth, but rather supported it.
COST Net Profit (Annual) data from YCharts.
Costco recently said that the price increase actually benefits members because it allows the company to offer the lowest prices possible. Sure, members will pay an extra $5 or $10 when their membership renews, but the savings they get from shopping at Costco will more than make up for that cost over the course of a year.
Historically, Costco’s stock has tended to do very well after membership increases, and the membership hikes themselves have not slowed the company’s revenue. Costco may lose some members, but it won’t be a big loss, since the majority of them are probably willing to shell out a few extra dollars for a year’s worth of bargains.
Does all this mean Costco stock will soar over the next few years? Of course, history doesn’t always repeat itself, and it’s impossible to predict stock price trends with 100% accuracy. But Costco has what it takes moving forward, and it’s safe to say the warehouse giant is the best long-term investment for investors right now.
