BING-JHEN HONG
Costco Wholesale Corporation (NASDAQ:COST) finally pulled the trigger on a membership fee increase after almost a full year of speculation over the topic. The price for the Gold Star membership is increasing to $65 from $60, while the price of the Executive membership is increasing to $130 from $120. There are around 25 million Gold Star members and about 27 million Executive members. The increases will go into effect on September 1.
Morgan Stanley thinks the membership fee increase was fairly well telegraphed and takes a back seat to the stock’s high trading multiple. Analyst Simeon Gutman estimated that without reinvestment, a membership fee increase would be worth ~$395 million, or ~$0.65 of EBIT/EPS over two years. However, looking back at the prior two fee increases in 2011 and 2017 to gauge how gross margin may be impacted, he said the analysis was inconclusive as the net two-year impact following 2011 was +12 basis points, while the net impact following 2017 was -137 basis points.
UBS analyst Zeyn Burak reminded investors that Costco’s (COST) model is that it uses its fees to invest in and subsidize the high-quality merchandise it sells. “Thus, having this incremental profit roll in will provide fuel to power its model. Besides, we think the timing and the magnitude of the increase was largely anticipated by the market,” noted Burak. USB estimates the cumulative benefit of the membership fee increase could be an estimated $1 in EPS in the next two years, excluding price investments. After factoring in investments, UBS raised its FY25 EPS estimate by $0.13 to $19.18 and lifted its FY26 EPS forecast by $0.50 to $21.00. “One important point to note is that we believe COST will start to reinvest the fee increase in the form of lower prices even before incremental monies flow in,” warned Burak. The implication is that the market should be braced for some near term margin pressure before Costco (COST) recoups it down the road.
Jefferies analyst Corey Tarlowe thinks the EPS lift for Costco (COST) could be ~3% over each of the next two years.
Bank of America analyst Robert Ohmes estimated that the membership fee increase will drive $370 million to $380 million of incremental membership fee income over the next two fiscal years, but also expects most of it to be reinvested back into the business.
Meanwhile, Oppenheimer analyst Rupesh Parikh advised investors to watch BJ’s Wholesale Club Holdings (BJRI), which could follow Costco (COST) with a membership fee increase of its own.
Shares of Costco (COST) were down 3.86% at 12:55 p.m. on Thursday, which just put a small dent in the 68% year-to-date gain.