Costco Wholesale Corporation (NASDAQ: COST), which operates a membership-based retail business, announced yesterday that annual membership fees for Gold Star members will increase by $5 starting from September 1. With this, the annual subscription fees for these members will come to $65. The price of the Executive membership will increase to $130 from $120 as well. At the end of the last quarter, Costco had 25 million Gold Star members and 27 million Executive members, and these price increases will boost revenue growth in the coming years. This marks the first membership fee increase since 2017 and comes at a time when investors were beginning to question the sustainability of Costco’s current valuation as the company is valued at an expensive forward P/E of 53 today. The company plans to reinvest some of the incremental revenue earned from these price hikes, which should lead to higher profits in the long term.
What's Up?
Costco, aided by the success of its membership model, has seen steady growth in revenue over the last five years. The company operates on thin margins as it sells products at a deeply discounted price but makes up for it by handling high volumes of unit sales. The company’s revenue has grown from $112 billion in 2014 to $253 billion in the last 12 months while net income has grown from $2 billion to $7 billion during this period. In recent years, the company has focused on enhancing its digital presence to appeal to the new generation of shoppers. In more encouraging news, the company is aggressively investing for its global expansion with significant growth already seen in markets such as Mexico, Japan, and South Korea.
What The Analysts Are Saying
Wall Street analysts are reacting positively to Costco’s decision to increase membership prices. Morgan Stanley analyst Simeon Gutman estimates that excluding reinvestments, the membership fee increase will result in a $395 million increase in EBIT over two years. UBS analyst Zeyn Burak also struck a bullish stance after digesting Costco’s price increase and claimed that the incremental profits generated from this decision will fuel its business model. According to the analyst, this membership increase will result in EPS growth of $1 in the next two years. Jefferies analyst Corey Tarlowe also believes that this price hike will lead to a 3% growth in EPS in the next couple of years. Bank of America analyst Robert Ohmes believes Costco will generate incremental membership fee revenue of $370 million to $380 million in the next two years as a result of these price hikes. Based on the ratings of 25 Wall Street analysts, the average Costco price target is $910, which implies an upside potential of 8% from the current market price.
Neither Dilantha Desilva nor Stocks.News have positions in this company.
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Dilantha is a former buy-side equity analyst who now contributes to Seeking Alpha, GuruFocus, TipRanks, and ValueWalk. He is the founder of Beat Billions, a premium investment research subscription service on Seeking Alpha’s Marketplace. He has appeared on CNBC and Bloomberg to discuss stock markets and the global economy.