Costco Hikes Fees by $5 as Q2 Earnings Miss

CFO Richard Galanti says the competitive challenges Costco is facing from Sam's Club and Target are “formidable.”
Matthew HellerMarch 6, 2017
Costco Hikes Fees by $5 as Q2 Earnings Miss

Costco is increasing its membership fee for the first time since 2011 as its latest quarterly results provided more evidence that competition from Wal-Mart’s Sam’s Club and Target is cutting into its business.

The warehouse club operator said that effective June 1, the annual fee for “Goldstar” individual members will go up to $60 from $55 while the fee for executive members will increase to $120 to $110. Costco has about 35 million members, roughly half of them executive members.

The announcement of the fee hikes came as Costco reported that it earned $515 million, or $1.17 per share, in the second quarter on revenue of $29.77 billion. The average estimates of 13 analysts surveyed by Zacks Investment Research had been for earnings of $1.35 per share on revenue of $29.99 billion.

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As CNN Money reports, Costco is facing tough competition from Sam’s Club and Target, both of which have lowered prices to attract more customers. In an earnings call, CFO Richard Galanti described the challenges presented by the two big-box giants as “formidable.”

Costco executives also said deflation has not only hit its food sales but also electronics, another key category for the company. TV prices in particular have been falling sharply.

According to Galanti, the increased membership fees are expected to give a slight boost to third-quarter earnings. Costco implements an increase every five years or so to keep up with inflation.

Sucharita Mulpuru, chief retail strategist at Shoptalk, doubted the hike would be a problem for diehard Costco customers. “These are customers who will pay $5 for a latte and not think twice about it,” she told MarketWatch. “I just don’t think they’ll drop their Costco membership because of this modest price increase.”

But Courtney Jespersen, a retail expert at NerdWallet, said shoppers who might already have been on the fence about their Costco membership might want to reevaluate. With the fee increase, Costco will be $15 more than rival $45 Sam’s Club’s standard membership (which doesn’t include pharmacy discounts) and $10 more than the $50 membership at BJ’s stores.