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Danger at Costco? Membership Growth Slowest in Years

Dec 09, 2015

Warehouse clubs like Costco Wholesale (cost) and Wal-Mart Stores' (wmt) Sam's Club rely on membership fees to even out the fluctuations in sales. They are a key source of profit for these businesses.

But more importantly, membership fees are something of a lead indicator of future sales. Membership at a Costco or Sam's Club gives shoppers access to huge discounts on everything from large electronics to grocery items to household appliances, making those retailers "sticky" to customers and generating a ton of repeat business. In many ways, these programs are the brick-and-mortar equivalent of, and precursor to, Amazon.com's (amzn) Prime program.

So Wall Street was unnerved on Wednesday when Costco's earnings report showed membership fees had grown by their lowest rate in several quarters, casting a cloud over its future revenue and contributing to a decline in profit.

To be fair, much of the pressure on Costco's membership fees, as well as overall revenue, stems from a strong U.S. dollar, which means international sales are translating into less revenue.

Still, membership fees of $593 million in the quarter ended November 22 came in less than the $621 million Wall Street firm Cowen & Co was expecting. That represents growth of 1.9%, an anemic performance for Costco. Growth in fees has ranged from 4.5% to 7.7% in Costco's four previous full fiscal years.

What's more, Costco reported a profit of $480 million, or $1.09 a share, compared with $496 million, or $1.12 a share, a year earlier. Analysts surveyed by Thomson Reuters were expecting $1.17 a share. The company's shares fell 5% on Wednesday morning.

Costco itself emphasized the importance of membership fees in its most recent annual report. "Membership loyalty and growth are essential to our business model," the company wrote. "The extent to which we achieve growth in our membership base, increase the penetration of our Executive members, and sustain high renewal rates materially influences our profitability."

And with the annual membership fee steady at $55, and the percentage of overall revenue from membership fees at 2.23%, slowing fee growth likely means Costco is losing some of its ability to line up new customers.

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