Average Fees for Costco to Rise with More Executive Members

September 24th, 2010 by Trefis Team
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Costco

The average membership fee that Costco (NASDAQ:COST) charges its cardholders has risen from around $26 in 2006 to $28 in 2009 [1], driven by increasing penetration of executive members. The annual membership fee gives Costco members access to a wide variety of merchandise at heavy discounts throughout the year. We expect steady growth in membership fee in the future. However, Costco could feel pricing pressure if competition from Sam’s Club, owned by Wal-Mart (NYSE:WMT), and BJ’s Wholesale (NYSE:BJ) increases.

We estimate that the value from membership fees constitutes around 15% of Costco’s stock price. We currently have a Trefis price estimate of about $50 for Costco’s stock, about 21% below the current market price of $64.

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Costco primarily has three types of members: Business, Gold Star and Executive. Business and Gold Star members are typically charged a membership fee of $50, while executive members are charged $100. Executive members account for about 60% of total Costco sales and have higher membership renewal rates of about 90% compared to overall renewal rates of 87% [2]. Executive membership penetration is on an upward trend and has increased from about 23% in mid 2007 to about 29% in mid 2009 [2]. This is likely to boost the average membership fee per cardholder for Costco.

The average of Trefis member forecasts for Average Membership Fee per Cardholder indicates an increase from $31 in 2010 to $39 by 2016, compared to the baseline Trefis estimate of an increase from $29 in 2010 to $32.50 by the end of the Trefis forecast period. The member estimates imply an upside of 3% to the Trefis price estimate for Costco’s stock.

You can drag the forecast trend-line above to express your own view, and see the sensitivity of Costco’s stock to Average Membership Fee per Cardholder.

Our complete analysis for Costco’s stock is here.

Notes:
1. Average Membership Fee per Cardholder is calculated as: (Membership Fee Revenues)/(Number of Membership Cardholders). Costco reports both Membership Fee Revenues and Number of Membership Cardholders in its SEC filings.
2. Reported by the company