The Value of Membership Fees to Costco Stock
Costco (NASDAQ:COST) traditionally competes with warehouse club operators including BJ’s Wholesale Club (NYSE:BJ) and Sam’s Club, in addition to large retailers like Wal-Mart (NYSE:WMT), Best Buy (NYSE:BBY) and Target (NYSE:TGT). The retailer operates a warehouse club model wherein it charges annual membership fees to customers and, in turn, offers deep discounts on selected merchandise.
Our price estimate for Costco’s stock stands at $49.76, which is about 30% below market price.
Business customers tend to buy in bulk, and hence can make significant savings if they buy at steep discounts from Costco. With this simple strategy, Costco has successfully expanded its customer base, mainly in executive membership which has seen rising penetration from about 23% in mid 2007 to about 29% in mid 2009.
Drag the trend line in the modifiable chart below to see how various trends in Costco membership totals could affect the company’s stock value.
Costco Membership Fees
The company has two key types of members: business members and Gold Star members. Businesses (including individuals with a business license, retail sales license or other evidence of operation) can qualify as business members. Gold Star members are those individuals who do not qualify as business members.
Business members typically pay a $50 membership fee with an add-on card available for $40. Gold Star members pay similar fees except that there is no add-on card available. The company also offers executive membership. Such members typically pay $100 as an annual fee and usually contribute a significant portion of Costco’s sales.
We’ve previously examined the potential for membership fee revenues to rise alongside growth in executive members (See Average Fees for Costco to Rise with More Executive Members)
With Costco’s membership structure representing a significant aspect of its business platform, we pose the following question…
What Percent of Costco’s Stock Value is Attributable to Membership Fees?
Make a selection below to see the answer
A: 8%
B: 15%
C: 23%
D: 30%