Costco Wholesale (COST) shares edged higher in early Thursday trading, after the stock hit a fresh record peak earlier in the session, as investors prepped for the bulk retailer's second quarter earnings report after the close of trading.
Costco has been one of the market's star performers over the past six months, adding more than $100 billion in value since the lows of October last year, powered in part by resilient consumer spending on discretionary items and expanding membership fees.
Elevated inflation and recent moves higher in gasoline prices have added to the retailer's overall value proposition as well, with data from Placer.ai indicating January store traffic increased 2.1% from a year earlier, with overall visits for the quarter rising 4.8%.
Costco itself said total sales for January, the final month of its fiscal second quarter, rose 4.5% from a year earlier to $22.08 billion, with digital activity surging more than 20%. Overall transaction sizes were up 0.1% from a year earlier.
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Analysts expect the group generated around $59.16 billion in total sales for the quarter, a 7% improvement from a year ago, with earnings rising just under 10% to $3.62 a share.
Earnings in focus, but member fees the highlight
Earlier this week Oppenheimer analyst Rupesh Parikh lifted his price target on Costco by $45 to $805 a share, citing solid fundamentals, while Telsey Advisory analyst Joseph Feldman boosted his by $35 to $750 a share.
The larger focus of the release, however, may rest on two key decisions from Costco, one of which has kept members and investors guessing for a number of years.
Membership fees from the group's 130 million Costco Club cardholders translate to one of its most important profit drivers, generating around $1.08 billion in revenue over the three months ended in October.
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That's only a small portion of the group's $57.8 billion first-quarter revenue, but the profit margin from those sales is exceptionally wider than its overall gross margin of around 11%.
The cost to shop at Costco now sits at $60 a year for a standard membership and $120 for a membership with cash back. That pricing hasn't increased since 2017, but some analysts suggest that could change soon.
Richard Galanti, who has served as Costco's chief financial officer since 1993, leaves the group March 15, making way for former Kroger (KR) CFO Gary Millerchip.
Slowing inflation could trigger fee jump
With mid-cost rivals such as Target introducing a paid membership option over the coming months, and lower-cost titan Walmart noting increased spending from its own membership base, Costco could be primed to lift its own fees as well.
Slowing inflation also could enable Costco to justify an increase, given that it has suggested that it didn't want to add a higher membership fee onto already cash-strapped customers.
"At the end of the day, with the headline being inflation, we feel very good about if we want [to raise membership fees], can we do it without impacting, in any meaningful way, renewal rates or signups or anything," Galanti told investors last spring.
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"But we feel that it’s incumbent upon us to be that beacon of light to our members" in terms of keeping membership fees unchanged, he insisted.
D.A. Davidson analyst Michael Baker, who carries a neutral rating with a $600 price target on Costco stock, is one analyst who sees a fee increase on the horizon.
"Membership trends remain strong, including renewals, new member signups and the mix towards higher-tier members," he said in a recent client note. "This all makes it easier for Costco to implement an increase."
Baker also suggests Costco could unveil a new special dividend as well, given it carried around $6.7 billion in cash on its balance sheet at the end of the first quarter.
Costco shares were marked 1.5% higher in late Thursday trading to change hands at $784.64 each, a move would extend the stock's six-month gain to around 43%.
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