The Russian invasion of Ukraine has investors scrambling for safer havens. Costco (NASDAQ:COST) and COST stock remain a popular choice to accomplish this goal.
The question I have for potential buyers is a simple one: What took you so long if you’re just getting on board the Costco train? Many smart investors bought long before the current volatility. Here’s why they’ll remain owners long after the war in Europe ends and the world goes back to some semblance of normal.
COST Stock Is a No-Brainer
If you invested $10,000 in Costco shares 10 years ago, today, you’d have $64,870. If you did the same with Walmart (NYSE:WMT), you’d have $29,260, or 55% less.
No one should be surprised by this. Costco’s annual membership was ahead of its time. It had a subscription business model long before Netflix (NASDAQ:NFLX) was created. It will be around long after the streaming giant’s founders fade into retirement with billions in their pockets.
I’ve been a major fan of Costco for years. Since my wife and I moved to Halifax, we go a lot more often than when we lived in Toronto. The company’s stores are steady and reliable. Thanks to the annual membership, that’s all they’ve got to be. Leave the trendsetting to some other flash in the pan.
In October 2012, I discussed the many reasons why Costco continued to win. Of course, low prices helped, but it’s the company’s relentless focus on its customers and employees that kept it way ahead of the pack:
“Many people think Costco is in the business of selling products at low prices. While its prices are indeed low, that’s not its ultimate goal. Mark Zuckerberg stated in [Meta Platforms’] (NASDAQ:FB) IPO prospectus, ‘We don’t build services to make money, we make money to build services.’ At Costco, that translates to ‘we sell products inexpensively not to generate revenue but to gain loyal members.’
Its real business is selling memberships at $55 a pop or more. As long as it keeps providing great products (the chicken is awesome) at good prices, it will continue to increase its membership. In fiscal 2007, membership revenue was $1.3 billion, or 81.3% of operating income. In fiscal 2012, membership revenue was $2.08 billion, or 75.2% of operating income.”
How Are Memberships Doing Today?
On March 3, Costco released its second-quarter 2022 earnings results. Its global same-store sales rose 14.4%, while its e-commerce comparable sales jumped 12.5%. It had revenue of $51.9 billion, 16% higher than Q2 2021. Costco had an operating profit of $1.81 billion, 35.2% higher than a year earlier.
Its total number of cardholders as of Feb. 13 was 114.8 million, 6% higher than a year earlier. Total paid members increased 6.2% to 63.4 million. Based on its half-year membership revenue of $1.9 billion, the average revenue per paid member from those fees in the first six months was $30.17. That’s $60.34 on an annualized basis.
So, in Q2 2022, it added 3.7 million paid members. At $60.34 per year, those new members are worth $2.2 billion in revenue over the next decade — and that’s just if membership fees remain at current levels.
They won’t. In April 2016, I wrote about the potential membership fee hike and its meaning for shareholders. At the time, the projected price increase was $5 to $10.
“If history is any indication, it won’t be bad for business as Costco tends to raise its fees every five or six years. Whether it will turn out fruitful is simply a matter of conviction based on past results,” I wrote.
The company ultimately did raise its membership prices in June 2017. Gold Star memberships increased by $5 to $60, while the Executive membership jumped by $10 to $120.
CFO Richard Galanti discussed another price hike in March, suggesting the company hasn’t decided on an increase. However, it will be five years in June, so given the average of 5.5 years, according to Galanti, investors can expect a hike sometime in the fall.
The Bottom Line on COST Stock
I’ve always considered Costco’s membership fees to be the pre-tax profits in the business with a pricing strategy that basically covers its overhead costs. As long as it adds a few million new members each quarter, the laws of math and compounding take over.
COST stock is a wise choice for any foundational portfolio in good times and bad.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
