Is Costco Stock a Good Buy After Raising Membership Fees?
Costco Wholesale Corporation has been a massive success over the past three decades, with its stock price outperforming most others, especially in the retail sector. The company’s focus on saving customers time and money has proven to be a stellar strategy, with the stock price surging over 2,500% since 2003. However, recent changes within the company, such as a new CEO and increased membership fees, have raised questions about the future potential of Costco as an investment.
Changes in Leadership and Membership Fees
In January 2024, long-time CEO Craig Jelinek stepped down and was replaced by Ron Vachris, who has been with Costco for over 40 years. The increase in membership fees, the first since 2017, has raised concerns among customers. While a $5 to $10 increase in fees may not seem substantial, any drop in membership could impact Costco’s operations. However, given the loyalty of its members and the company’s strong track record, it is unlikely that Costco will see a significant decline in membership due to the fee hikes.
Strong Operating Performance
Despite the recent changes, Costco reported solid earnings for the third quarter of its fiscal year 2024, showing growth in net sales, net income, and comparable location sales. These results demonstrate that Costco continues to perform well under its new CEO. However, with the stock price already reflecting this success, investors may need to consider the potential for further growth.
Potential for International Expansion
As Costco relies heavily on membership fees for revenue, one potential avenue for growth is through international expansion. With competition from major retailers like Walmart, Target, and Amazon in the U.S., Costco may look to expand its reach outside the country. The company’s cautious approach to international expansion bodes well for investors, as Costco has a history of slow and steady success.
Valuation and Investment Opportunity
| Ticker | Price-to-Earnings Ratio | Price-to-Free Cash Flow Ratio | Dividend Yield | Dividend Coverage Ratio |
|---|---|---|---|---|
| COST | 36.1 | 67.0 | 0.71% | 3.9 |
While Costco’s dividend yield may not be high, the company pays a substantial dividend that is well covered, making it attractive to income investors. Growth investors may benefit from adding shares of Costco to their portfolio, as the dividend can offer rewards while waiting for international membership growth.
In conclusion, despite being fully valued based on its current business, Costco remains a strong investment opportunity for those with patience and a long-term perspective.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Joseph Arroyo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, Target, and Walmart. The Motley Fool has a disclosure policy.