Membership Fees Are Big Profit
Costco’s (NASDAQ: COST) shares have defied the market downturn driven by inflation worries, the war in the Middle East, and a decline in consumer confidence. Its stock is up 14% this year while the S&P 500 has dropped 7%. Its costs should rise soon, however, because the prices of hundreds of items will be affected by tankers trapped and unable to transit the Strait of Hormuz. In the meantime, its shares have even outperformed industry leader Walmart (NYSE: WMT).
Costco has two things that help it today. One is its ability to buy in bulk as a retailer; Costco currently operates 924 warehouses, including 634 in the United States and Puerto Rico. Another is that its stores have gas stations. It keeps gas prices below the market price. Costco CFO Gary Millerchip recently said, “Generally speaking, we see about half of members who will shop at the gas station will also cross-shop at the warehouse.” Buy gas and then go shopping.
Costco also has an in-house brand, Kirkland, that offers shoppers additional discounts.
Costco’s other significant advantage, financially, is its membership fees. It has 81 million members. Its “Gold Star” membership is $65 a year. “Executive” members pay $130. Among other things, the more expensive fee allows people to receive monthly credits and same-day delivery.
Membership fees account for 2% of Costco’s revenue and 73% of gross profit. This margin helps Costco keep in-store prices low. The renewal rates among members has been put at over 90%.
Unlike most retailers, Costco reports its revenue and same-store sales monthly and for the most recent 24 months. For the 24 months that ended February 16, revenue rose 8.6% to $136.9 billion. Membership fees revenue rose 13.8% to $2.68 billion. Net income rose 12.5% to $4.04 billion. (Costco also provided numbers for the trailing two quarters.)
Shopping is going to get more expensive in the US. Some of the inflation will come from gasoline. Other costs will rise because of supply chain interruptions. If any retailer can weather this storm, it is Costco.
