Research shows that an increase in Costco’s membership fee would meet with little resistance – we think so too
Ali Khusen
December 21, 2022
5 min read
Most U.S. shoppers say they’re willing to pay more for their retail club membership — a sentiment that bodes well for Investing Club with Costco (COST). The survey says… According to an Evercore ISI survey of more than 2,500 U.S. consumers, more than 80% said they would be willing to pay a higher annual fee to stay in their shopping clubs, an increase of 25 percentage points from 2015. research also found that Americans plan to renew memberships at “record highs,” or more than nine out of every 10 respondents. “We considered member pullbacks to be minimal and lower than last year’s surveys,” Evercore said, signaling that consumers are open to rate increases following increases to Amazon’s (AMZN) Prime service in March and Walmart’s (WMT) Sam’s Club in October. This is a positive read through for Costco, which has not raised annual membership prices for several years. The Evercore survey reported that Costco had the “highest price inelasticity” or consistent demand for its products even in a deteriorating economy, with 60% of its members willing to pay 10% or more in membership fees. In addition, an overwhelming 94% of Costco members in the survey said they will “definitely” or “probably” renew their membership as loyal customers continue to see value in the club model. Those numbers equate to renewal rates in the US and Canada of 92.5%, according to Costco’s latest quarterly results, released earlier this month. The global renewal rate was 90.4%. As a result of the survey results, Evercore favors Costco due to a planned increase in fees and the potential for a special dividend sometime next year. The company maintained its outperform or buy rating on COST and raised its stock price target from $530 to $540 per share. “We are increasing our COST base case as a result of today’s research results as the company (Costco) appears well positioned to continue growing as visitor numbers and renewals reached record highs, with the added research insight that an increase in costs is likely relatively well received by members while accelerating double-digit earnings growth,” Evercore analysts said. Costco’s standard Gold Star membership costs $60 per year. For an additional $60, customers get Executive Membership and earn extra rewards and reduced prices on select products and services. Costco’s last membership price increase was in June 2017, when the wholesaler increased its standard membership fee from $55 to $60 and its Executive membership from $110 to $120. Historically, Costco has increased its dues every five years, an anniversary that is a few months ago has passed. While no formal announcements have been made yet, CFO Richard Galanti said in the company’s latest earnings report that “it’s a question of when not, if.” Galanti added during the Dec. 9 call, “We feel like we’re in a very strong position right now. And if we have to wait a few months or several months, that’s fine.” Earlier this year, management said the company has delayed raising membership fees as inflationary pressures weigh on consumers. But with decades of high inflation showing signs of cooling as of late, that could support Costco’s plea to increase fees. Evercore analysts think Costco could make the announcement in April 2023. Shares of Costco closed nearly 1% on Wednesday at $462.06 apiece. The stock is down 18% year-to-date, pretty much in line with the S&P 500’s 2022 decline. For the Club, we’re sitting at an unrealized gain of nearly 60% gains on stocks bought in 2020. owns 110 shares of COST for a weight of 1.8% in the portfolio. On December 1, we sold 55 shares of COST and downgraded it to a rating of 2. Bottom line Positive consumer survey results from Evercore – which confirmed strong membership renewal rates, as seen in the last quarter – indicate that any Costco membership increases are likely to be very meet little resistance from shoppers and could be a catalyst for stocks. That’s a point of view that we share, and it aligns with our wholesale investment case, which we believe is best-in-class. Consumers are willing to pay more for membership fees because they know Costco has cost-cutting deals that offer a strong value proposition unmatched by retail competitors. It is a volume driven company. With inflation eroding consumer purchasing power, Americans are turning to discounts. In a recent interview with Costco CEO Jim Cramer, Craig Jelinek called the company the “price police,” as it constantly negotiates prices with its suppliers to get the best deals for its members. Another potential catalyst for Costco stock is the company’s likely decision to pay a special dividend, which Evercore says could happen in 2023. Costco has more cash on its balance sheet than it needs to run its business, allowing it to reward shareholders with an additional cash dividend on Costco common stock in addition to the quarterly dividend. The last time Costco announced its special dividend was in November 2020 at $10 per share. The company has issued it four times in the past eight years. While we are long-term investors in Costco, we know that the retailer is not immune to a slowing economy. Overall, we are cautious on the retail sector as macro headwinds continue to plague consumers, which explains why we favor value-based stores. Costco is the best among its peers as it delivers sustainable revenues, records record membership renewal rates, and returns cash to shareholders – all while expanding its presence on a global scale. (Jim Cramer’s Charitable Trust is long COST. See here for a full list of the shares.) As a subscriber to the TBEN Investing Club with Jim Cramer, you receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charity’s portfolio. If Jim has talked about a stock on TBEN TV, he will wait 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER. NO FIDUCIAL OBLIGATION OR DUTY EXISTS OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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Most US shoppers say they are willing to pay more for their retail club membership – a sentiment that bodes well for the Investing Club holding company Costco (COST).
