Costco is likely to raise membership fees this year - what does it mean for the stock?
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JPMorgan crunched the numbers on Monday in regard to the impact of an increase in Costco Wholesale Corporation's (NASDAQ:COST) membership fee. The issue is pertinent because during Costco's (COST) recent earnings call management noted that the fee increase is a matter of when and not if.
Analyst Christopher Horvers and team estimate a potential ~1% to 2% EPS lift for Costco (COST) in FY24 should they raise fees by $5 for Goldstar members and $10 for Executive members at the start of FQ4 (mid-May) and reinvest half of the increase back into member benefits.
"COST raising its membership fee is a constant focus for investors given it is potential pure flowthrough and considering its overall thin margin structure (~1.6% operating income rate ex-membership fees)," noted Horvers.
Crucially, Horvers and team warned that the fee increase could be different this time for COST in that replicating its last increase is less accretive given sales and earnings have grown much faster than the member count, especially during COVID. By comparison, 35M Costco (COST) members were affected on a total sales base of $129B during the last membership fee increase vs. the current $234B in sales COST generated over the last 12 months while its total households have grown at a much lower rate. By JPMorgan's math, the EPS benefit from a FQ4 membership fee hike announcement is $0.60 to total EPS - weighted primarily to FY24. It is also possible that some of the benefit will be reinvested back into product pricing. The upshot is that a share price rally based on the expected membership fee news has the potential to be overstated.
Read how Costco (COST) phrased the membership fee income question during the recent earnings call.