Costco (COST 1.15%) recently reported strong fiscal third-quarter results and talked about a potential membership-fee increase down the road. The stock has been a strong performer, up over 60% in the past year.
Let's take a closer look at the retailer's most recent earnings, the potential impact of a membership-fee increase, and whether now is a good time to buy the stock.
Rising sales and potential membership-fee increases
Costco's stellar fiscal Q3 results showed its revenue rising 9% to $58.5 billion. Retail sales accounted for $57.4 billion of the total, with membership fees totaling $1.1 billion.
Same-store sales rose 6.6%, or 6.5% when adjusted for changes in gasoline prices and foreign exchange. U.S. same-store sales rose 6.2%, or 6% adjusted, while Canadian comparable-store sales rose 7.7%, or 7.4% adjusted. Other international same-store sales climbed 7.7%, or 8.5% adjusted. E-commerce revenue, meanwhile, jumped 20.7%.
The rise in same-store sales came largely from increased customer visits, which rose by 6.1% worldwide and 5.5% in the U.S. Average transaction size, meanwhile, edged up 0.5%.
Adjusted earnings per share (EPS) rose from $3.43 last year to $3.78.
The warehouse-store operator ended the quarter with 74.5 million paid household members, up 7.8% year over year. Its renewal rate was 93% in North America and 90.5% worldwide.
On its conference call, the company discussed several potential growth drivers. Expansion is one of them, with Costco looking to add 12 new stores the rest of this fiscal year, including nine in the U.S. That would bring the total net-new stores this fiscal year to 29. The company believes that it can continue to add between 25 and 30 stores a year for the foreseeable future, with about half being in the U.S. It sees plenty of in-fill opportunities, as it says many of its warehouses are very busy.
The company is also looking to expand services. It has expanded a partnership with Uber Eatsto deliver Costco products in 17 states and Canada. It is also looking to expand its Costco Next platform, which lets Costco members get limited-time deals that can be bought directly from its suppliers. This is a bit of a different take on the third-party marketplace that Amazon has made so successful.
Increasing membership fees is another lever the company has. It noted on its call that it typically increases membership fees every five years but is now well beyond that point. It said it is a matter of when it will increase the fee not if it will increase it, but it is still evaluating the timing.
The company has not raised its fee since 2017 when it took its normal membership from $55 to $60 and its executive membership, which includes 2% cash back on purchases, from $110 to $120.
Image source: Getty Images.
Time to buy the stock?
Increasing memberships fees is one of the quickest ways for the company to grow earnings. While only a small part of Costco's sales, its membership fees are virtually 100% gross margin, which means all the revenue drops to operating income. So the membership fees make up about half its operating income.
A similar $5 and $10 price increase like the one in 2017 would add close to $375 million in yearly-operating income, or around $280 million in net income after taxes, which would be around $0.63 a year in earnings per share before adding any new members that come along with new-store openings.
From a valuation perspective, Costco trades at more than a 50 times forward price-to-earnings (P/E) ratio. That's not cheap, and the stock is trading at the highest level it's been at over the past decade. As such, it looks like much of this potential membership-fee increase is already priced into the stock.
COST PE Ratio (Forward) data by YCharts.
Now admittedly, Costco stock has never been cheap, and the stock has been fabulous to own over the years. In fact, the stock gained almost 700% over the past decade.
However, with it now trading at its highest valuation in a decade and at nearly twice the multiple it traded at during many points before the pandemic, I'd have to stay on the sidelines with this retail stock even with a potential membership-fee catalyst in the future.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Uber Technologies. The Motley Fool has a disclosure policy.
