Costco Hikes Membership Fees At Long Last; Analysts Caution Of 'Sell The News' Event, Point To Stock Underperformance After Last 3 Hikes
Retailer Costco Wholesale Corporation (NASDAQ:COST) announced a membership fee increase Wednesday after market close.
The company's new fee increase will see members paying an additional $5 annually for its Gold Star and Business levels and an additional $10 annually for its Executive memberships. The fee increase, which will impact around 52 million members, will kick in on Sept. 1.
Analysts break down the impact of the membership fee increase and Costco's June monthly sales that were also reported Wednesday.
The Costco Analysts:
- Stifel analyst Mark Astrachan has a Buy rating and raises the price target from $900 to $950.
- DA Davidson analyst Michael Baker has a Neutral rating and price target of $780.
- Bank of America analyst Robert Ohmes has a Buy rating and raises the price target from $874 to $962.
- JPMorgan analyst Christopher Horvers has an Overweight rating and price target of $925.
- Goldman Sachs analyst Kate McShane has a Buy rating and price target of $851.
- Telsey analyst Joseph Feldman has an Outperform rating and raises the price target from $900 to $925.
Stifel on Costco: Non-food comparable sales rose by low double digits in June, a highlight noted by Astrachan from the month’s figures.
The analyst said this is the eighth consecutive month of positive segment growth, which could suggest market share gains in discretionary categories. Food and fresh food segments also saw growth in June, showing strength for the grocery categories, the analyst added.
"Traffic remained solid, up 6.6% globally and 5.9% in the U.S." Astrachan said.
On the membership fee increase (MFI) front, the analyst said it could add around 4% to pre-tax income assuming a minimal impact on renewal rates.
"We view the MFI favorably in that it will support the company's value proposition enabling it to offer more favorable prices across a large spectrum of products, increasing shopper frequency and store traffic, while also recruiting new and retaining existing members."
Astrachan said that Costco shares outperformed the S&P 500 in the periods before the last three membership fee increases, but underperformed in the three, six, nine and 12-month periods after a membership fee increase.
DA Davidson on Costco: A "long awaited fee increase" from Costco and a strong month of comparable sales in June are highlighted by Baker in a new investor note.
"While most market participants expected this news at some point, the timing was not known," Baker said.
The analyst said this increase comes seven years after the last one, higher than the company's average of 5.5 years.
The stock is now removed from the analyst's STAMPEDE list, with the catalyst of a fee increase now over.
Baker estimates the membership fee increase will add $377 million in revenues over the 24 months once implemented, or around $189 million annually. The analyst estimates this could add 31 cents to 2025 earnings per share.
"We believe the stock underperforms on a ‘sell the news' dynamic."
Bank of America on Costco: The retailer showed comp strength and better earnings visibility for the next two fiscal years, Ohmes said.
"We estimate the membership fee increase will drive $370-$380 million of incremental membership fee income over the next two fiscal years," Ohmes said.
The analyst notes that Costco does not expect the membership fee increase to impact earnings per share growth, with a commitment to reinvesting back into the business.
Ohmes said Costco saw strong growth in June for non-food categories, highlighting items like jewelry, gift cards, toys and gold bars.
"We reiterate our Buy and expect COST to gain share in the current environment as consumers continue to adjust to higher prices, making COST's impressive value proposition and price positioning even more attractive."
JPMorgan on Costco: A look at regional performance for Costco in June is part of a new investor note from Horvers.
"The best performing regions in the U.S. were the Northeast, Texas, and the Southeast while International was led by Mexico, Australia, and Korea," Horvers said.
The analyst said non-food sales were a strong part of the June report.
"Given widespread concerns on the consumer, COST remains a beacon of strength on traffic, comp, and the composition of sales."
Goldman Sachs on Costco: More value for Costco customers after the membership fee increase is an area to watch, according to McShane.
The analyst said the membership fee increase could add $400 million in revenue over the next two years.
"The company reiterated its confidence in the value proposition they have added over the past seven years and that the customer recognizes that value," McShane said.
Telsey on Costco: Core merchandise comparable sales were better than expected in June, Feldman said.
"Costco executed well and gained market share in June 2024," Feldman added.
The analyst said Costco's e-commerce sales growth showed a recovery of non-food items and the expansion of products.
Feldman said the membership fee increase could add $196 million to membership fee income for fiscal 2025 and 32 cents to fiscal 2025 earnings per share.
"We believe Costco is executing exceptionally well in this uncertain operating environment."
COST Price Action: Costco shares are down 3.6% to $852.02 on Thursday, versus a 52-week trading range of $518.76 to $896.67.
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