Costco Wholesale (NASDAQ: COST) is a fairly straightforward retail stock. It doesn’t have the glitz and glamour of tech, and it’s a stock that’s been beating the market for decades. But the past few months have been a nonstop, action-packed story for the warehouse giant.
The latest announcement is that they are taking a tougher approach to non-members visiting the store. Let’s take a look at what’s happening at Costco and whether this is something to worry about.
Keeping Track of Costco
A lot has happened at Costco. Here is a list of important events for Costco in the past few months in chronological order:
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Craig Jelinek stepped down as CEO and Ron Vachris took over.
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Costco paid a special dividend of $15.
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CFO Richard Galanti stepped down and Gary Millerchip took over.
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Costco announced the long-awaited rate increase.
The latest addition to this list is Costco, which wrote on its website that it will be installing card scanners in all of its stores to crack down on membership sharing.
How Costco Makes Money
Membership is a key part of Costco’s operating model. Members pay $60 a year for the privilege of shopping at Costco warehouses, but in September that will increase to $65 for a basic membership and $130 for an executive membership.
Costco’s products have low markups, and the company keeps its warehouses low-maintenance so that prices cover associated costs. It makes most of its money from the memberships it sells, and it keeps volume and sales high by providing value to members.
For example, here’s how it played out in the fiscal third quarter (ended May 12): Revenue was $58.5 billion, including $1.1 billion in membership fees. Gross margin was 10.8%, and net income came in at $1.7 billion.
It’s easy to see why it would be important for the company to be strict about member sharing. So why the sudden announcement?
Change leads to change
If you shop at Costco, you know that Costco already has mechanisms in place to keep non-members out. You must show your card when you enter the store and again at checkout.
But as straightforward and perhaps even boring as Costco may be, old, stodgy Costco is not. E-commerce is one of the biggest growth drivers, up nearly 21 percent in the third quarter, and Costco has installed self-checkout lanes in many of its stores. Non-members who can bypass the entrance can still shop and pay at these checkouts.
Management said member sharing increased during the pandemic, but it was lax in enforcing the rules when shoppers were under severe pressure. However, member sharing has now become more widespread as it has self-checkouts and shoppers don’t have to show their cards to a cashier.
Management was preoccupied with member complaints, “So the idea was we had to ramp that up a little bit, and we did,” former CEO Rochard Galanti said in March. He said that in a pilot program to curb member sharing, Costco made more money from new signups than it lost from turning away non-members, but that it was more a matter of “hygiene.”
Is this a warning sign?
This is actually not new, as it has been in testing mode for a few months in certain locations. The news is that it is now being rolled out to all locations.
It doesn’t seem like Costco is doing this because it needs money. Memberships and renewals have been consistently strong, and that hasn’t changed recently. Renewal rates in the U.S. and Canada rose slightly in the third quarter to 93%, and paid family members rose 7.8% year over year.
More likely, as Galanti said, Costco is doing this to keep operations running smoothly and provide value to its members. It could also be related to the change in management. Vachris is a Costco veteran, but Millerchip comes from the CFO role at KrogerIt wouldn’t be surprising if they made some changes.
Costco has put investors on edge in recent months, and investors should definitely keep their eyes peeled. But Costco is stable and reliable, and this will likely be more newsworthy than notable.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.
Is This a Warning Sign for Costco Stock? was originally published by The Motley Fool
