Costco discussing membership rate hikes after renewals hit 90%

Costco
COST,
-0.15%
ended the third quarter with 64.4 million paid households and 116.6 million cardholders. The warehouse retailer also ended the quarter with a worldwide renewal rate of 90%, the first time it has reached that level. In the U.S. and Canada, the renewal rate was 92.3%.

Costco also has warehouses in Spain, China, Mexico and other countries around the globe. Executive members make up 43% of the member base and account for 71% of global sales.

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“Historically, we’ve raised fees every five to six years with the last three increases coming on average about the 5.5 year time frame,” said Robert Nelson, Costco’s senior vice president of treasury, planning and investor relations, on the earnings call, according to a FactSet transcript of the Q3 earnings call.

Nelson said “there would be more discussions” as the company approaches that timeframe. But “given the current macro environment, the historically high inflation and the burden it’s having on our members and all consumers in general, we think increasing our membership fee today ahead of our typical timing is not the right time.”

Costco reported quarterly sales of $52.6 billion and earnings of $3.04 a share in late May.

May sales, which were announced last week, rose 16.9% to $18.23 billion.

With inflation reaching a 40-year high and putting pressure on consumer grocery bills, there had been concern that Costco would raise the price of its $1.50 hot-dog deal. The retailer isn’t touching that, but muffins and croissants weren’t spared a price hike.

See: Walmart says consumers are trading down to private label for items like dairy and bacon

Costco estimates that price inflation was about 7% in the fiscal third quarter. Costco, like other retailers, received some holiday merchandise late because of supply chain disruptions, but will hang on to the inventory until the fall.

“Amid an inflationary backdrop, Costco has effectively balanced sales growth and profit in recent quarters with reinvestment,” Stifel analysts wrote after the May numbers were announced.

“We anticipate this trend will continue, driving double-digit operating income growth over the next several years.”

Stifel rates Costco stock buy with a $515 price target.

“In an increasingly difficult economic environment, we believe Costco’s extremely competitive pricing will allow the company to take further market share (while its higher-income consumer base helps insulate it against a broader economic slowdown),” wrote Truist Securities in a recent note.

Truist rates Costco stock buy with a $543 price target.

UBS analysts were upbeat on Costco’s customers, and remained bullish on the stock.

“Looking ahead, we expect Costco to see incremental interest from consumers as they attempt to maximize value amid an uncertain backdrop. Plus, its rapid sales growth should keep it more insulated from the discounting that is likely to take place across retail due to the glut of inventory,” said UBS.

UBS rates Costco stock buy with a $595 price target.

And: Target’s steps to reduce inventory glut are correct but are a few weeks late, analyst says

Costco stock has slumped nearly 17% for the year to date while the benchmark S&P 500 index
SPX,
+0.95%
is down 12.7% for the period.