Survey shows a Costco membership fee hike would face little resistance — we think so, too

Published Wed, Dec 21 20225:03 PM EST

Most American shoppers say they are willing to pay more for their retail club memberships — a sentiment that bodes well for Investing Club holding Costco (COST). The survey says ... According to an Evercore ISI survey of more than 2,500 U.S. consumers, more than 80% said they'd be willing to pay a higher annual fee to stay in their shopping clubs, up 25 percentage points from 2015. The survey also found that Americans intend to renew memberships at "record high levels," or more than nine of every 10 respondents. "We viewed member pushback as minimal and lower than prior year surveys," Evercore said, indicating consumers are receptive to fee hikes following increases for Amazon's (AMZN) Prime service in March and Walmart's (WMT) Sam's Club in October. This is a positive readthrough for Costco, which hasn't hiked annual membership prices in several years. In the Evercore survey, Costco was reported as having the "highest fee inelasticity," or consistent demand for its products, even in a deteriorating economy, with 60% of its members willing to pay 10% or more in membership fees. Moreover, an overwhelming 94% of Costco members in the survey said they'll 'definitely' or 'probably' renew their memberships as loyal customers continue to see value in the club model. Those numbers are consistent with renewal rates in the U.S. and Canada at 92.5%, according to Costco's latest quarterly results , which were released earlier this month. The worldwide renewal rate was 90.4%. As a result of the survey findings, Evercore favors Costco for a planned fee increase and the potential for a special dividend sometime next year. The firm kept its outperform, or buy rating, on COST and increased the stock's price target to $540 per share from $530. "We are boosting our COST base case as a result of today's survey findings, as the company (Costco) appears well positioned to continue compounding as traffic and renewal rates hit record highs, with the added survey insight that a fee hike is likely to be relatively well received by members while boosting earnings growth to double digits," analysts at Evercore said. Costco's standard Gold Star Membership costs $60 per year. For an additional $60, customers get the Executive Membership and earn additional rewards and lower prices on certain products and services. Costco's last membership price hike was in June 2017, when the wholesale retailer increased its standard membership fee from $55 to $60 and its Executive membership from $110 to $120. Historically, Costco has increased its membership fee every five years, an anniversary that passed a few months ago. While no formal announcements have been made yet, CFO Richard Galanti said in the company's last earnings report that "it's a question of when not, if." Galanti added during the Dec. 9 call, "We feel that we're in a very strong position right now. And if we have to wait a few months or several months, that's fine." Earlier this year, management said the company has held off raising membership fees as the inflation burden has weighed on consumers. But with decades-high inflation showing signs of cooling as of late, that could support Costco's case to increase fees. Evercore analysts believe Costco could make the announcement in April 2023 Shares of Costco closed up nearly 1% on Wednesday at $462.06 apiece. The stock has dropped 18% year to date, pretty much in line with the S & P 500 's decline in 2022. For the Club, we're sitting on an unrealized gain of nearly 60% gain on stock purchased in 2020. We own 110 shares of COST for a 1.8% weighting in the portfolio. On Dec. 1, we sold 55 shares of COST and lowered it to a 2 rating . Bottom line Positive consumer survey results from Evercore — which confirmed strong membership renewal rates, as seen in its latest quarter — signal that any Costco membership fee increases would likely be met with very little resistance from shoppers and could be a catalyst for the stock. That's a position we share, and it aligns with our investment case on the wholesale retailer, which we think is best in class. Consumers are willing to pay more for membership fees because they know Costco has cost-saving deals, offering a strong value proposition unmatched by retail competitors. It's a volume-driven company. As inflation is deteriorating consumer spending power, Americans are seeking refuge in discounts. In a recent interview with Jim Cramer, Costco CEO, Craig Jelinek called the compamy the "price police," because it constantly negotiates prices with its suppliers to get the best deals for its members. Another potential catalyst for Costco stock is the company's likely decision to issue a special dividend, which Evercore thinks could happen in 2023. Costco has more cash sitting on its balance sheet than what it needs to run its business, allowing it to reward shareholders with an additional cash dividend on Costco common stock in addition to its quarterly dividend. The last time Costco declared its special dividend was in November 2020 at $10 per share. The company has issued it four times in the past eight years. While long-term investors in Costco, we know the retailer isn't immune to a slower economy. Overall, we are cautious of the retail sector as macroeconomic headwinds continue to plague consumers, explaining why we prefer value-based stores. Costco is the best among its peers since it delivers durable earnings, record membership renewal rates and returns cash to shareholders — all while expanding its presence on a global scale. (Jim Cramer's Charitable Trust is long COST. 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Most American shoppers say they are willing to pay more for their retail club memberships — a sentiment that bodes well for Investing Club holding Costco (COST).