Costco (NASDAQ:COST) is raising its membership fees for the first time in seven years. Beginning Sept. 1, the annual fee for the warehouse club’s basic and business membership will rise $5 to $65 while the executive membership will rise $10 to $130 per year.
Historically, Costco has raised its fees every five or six years. But leadership previously said the impact of inflation upon consumer wallets made delaying any increase the right thing to do.
So it was always a matter of time before Costco hiked the fee. Yet following the announcement, Costco stock dropped and then continued falling afterward. Shares are now down 7% since the announcement. It makes this an opportune time to buy Costco stock.
A No-Cost Cash Boost
The membership hike is an immediate cash infusion to Costco’s top line. In its fiscal third quarter, the warehouse club reported $1.1 billion in revenue from member fees. That was an 8% increase from the year ago period as it brought in new members.
While there are about 73 million memberships, Costco says the fee increase will affect 52 million of them, a little more than half of which are executive members.
Doing a little back-of-the-envelope calculations, if 26 million members see a $5 increase and 26 million or so see a $10 fee hike, that is about $390 million in additional revenue every year. Not to mention the extra revenue it will bring in from new customers signing up.
Make no mistake, that’s a drop in the bucket for the retailer. It generated $242 billion in annual sales last year and revenue is up 7% over the first nine months of the current fiscal year. So $390 million is less than 1% of total annual revenue. It’s a rounding error for the company.
Yet the total falls directly to the bottom line as there are few, if any, costs associated with the increase. Costco reported third-quarter operating income of around $2.2 billion and about half of that came from membership fees.
Unstoppable Growth
Costco’s business is still growing strong. In its June sales update, the warehouse club said U.S. comparable sales absent gasoline sales, were up 6.3% for the month and 4.8% high over the 44 weeks of the fiscal year. Overall, comps were up 6.9% and 5.6%, respectively.
Notably, e-commerce comps were more than 19% and 15% higher, respectively, for the two periods. So across all channels, Costco business is getting stronger.
With consumers signaling they have reached a max on rising costs, shopping at Costco becomes more relevant than ever. It also makes the retailer a cash-generating machine.
Returning Value to Shareholders
Costco free cash flow has grown at a compounded annual growth rate (CAGR) of nearly 13% over the last five years, while over the past decade it has increased at a 17% CAGR. It is the reason it has been able to pay and grow its dividend at double-digit rates over those time frames.
Costco’s dividend of $4.64 per share yields just 0.6% annually. Yet it has grown the payout at a 13% CAGR for the last 10 years. With an FCF payout ratio of 18.5%, there is plenty of room for future growth too.
Moreover, Costco often pays its shareholders a large special dividend. Last December it announced investors would receive a one-time $15 per share payout. There is a good likelihood Costco will reward investors again this year after the fee hike.
A Cheap Price to Pay
Costco stock has been a growth juggernaut. A $1,000 investment in the warehouse club 20 years ago would be worth nearly $30,000 today with dividends reinvested. That’s a 2,900% increase in value versus a mere 640% return by the S&P 500.
Buying Costco stock at anytime over the past two decades would be a smart move. But after its recent 7% drop following the membership fee hike makes this a great time to buy COST shares.
On the date of publication, Rich Duprey did not hold (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
