Costco is Increasing Membership Fees

Costco membership fees are going up. Here’s what this means for investors. 

Costco Wholesale Corp (NASDAQ:COST) recently announced that it will be raising its membership fees effective June 1 later this year. This means a lot of U.S. and Canadian residents will be paying more to continue shopping at their favorite wholesale location. The “Goldstar” or individual business memberships in Canada will rise by $5, bringing the total cost to $60 a year. This is the first time Costco has raised membership fees in 6 years. This $5 increase represents a 1.5% annual inflation rate for Costco shoppers. As for the “Executive” memberships, which is more expensive because it offers 2% rewards on Costco purchases, will increase from $110 to $120. The company also increased the maximum annual 2% reward from $750 to $1,000, which is a nice boost for serious shoppers. Costco as of November had nearly 90 million card-carrying members across North America.

As of the most recent quarterly filings, Costco has 728 warehouse locations, including 508 in the U.S. and 94 in Canada. This is 30 more stores than it had from a year ago in the same quarter. The company has said it plans to open another 29 locations for 2017. This works out to be roughly 4% more stores every year, which is an aggressive mandate to follow. It shows that management is quite confident that the business will garner more demand for sales in the future.

From an investment perspective, the announcement of the fee increase is good news because it should translate into higher revenue for the company. Membership fees account for roughly three quarters of overall operating income and help stabilize retail margin swings. Earning more income is what the company needs right now as it missed earnings expectation last week. The wholesale giant reported earnings per share of $1.17, which is 13% lower than the $1.35 as foretasted by analysts. The previous quarter didn’t look good either as the number was below expectations again, albeit only by 2%.

While it’s easy to focus on the missed earnings, it’s important to take a look at the long term profitability of the company. Using the Graham Formula, we can determine an intrinsic value of each COST share today. Its annual EPS from the most recent data is $5.4. Its long term earnings growth is expected to be 10.71%. The current yield on 20 year AAA corporate bonds is 3.8%. So plugging these numbers into the formula we see that Costco should be worth $187 per share. As of writing this post COST is trading at $166/share. This suggests the stock is trading at a 12.7% discount to its real value according to the Graham formula. The stock did reach as high as $178/share earlier this month but had a decent 7% pull back. Most of Wall St. seem to like the stock. Out of 26 analysts covering Costco, 9 currently have a hold rating. 11 say it’s a buy. And 6 have a strong buy rating. The average 12 month price target for the stock is $181/share. Costco only pays a 1% dividend so it’s not the best stock to own for investors looking for yield. But as a growth stock it has potential.

The Company offers merchandise in various categories, which include foods (including dry foods, packaged foods and groceries); sundries (including snack foods, candy, alcoholic and nonalcoholic beverages, and cleaning supplies); hardlines (including appliances, electronics, health and beauty aids, hardware, and garden and patio); fresh foods (including meat, produce, deli and bakery); softlines (including apparel and small appliances), and other (including gas stations and pharmacy). As cash strapped Americans continue to seek out fresh foods and items in bulk, I would expect to see continued growth in Costco’s top and bottom lines moving forward.

This author does not have any shares in COST and does not plan to own any within 72 hours of this post.