Costco Raises Member Fees as Q4 Profit Misses

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Issaquah,WA—Costco Wholesale Corp. said today it plans to increase membership fees about 10% to its 22 million members in November. The increase came as the nation’s largest wholesale club reported its fourth quarter profit missed expectations despite sales growth.

For the quarter ended August 28, Costco posted an 11% increase in its net income to $478 million, or $1.08 a share, up from $432 million, or 97 cents, a year earlier. Analysts’ average estimate, however, expected earnings of $1.10 a share.

Net revenue for the quarter hit $27.6 billion, up 17% from the same period a year ago and just missing analysts’ estimates for $27.8 billion in revenue. Membership fees accounted for $590 million, up from $533 million last year.

Costco said its revenue also was helped by sales from its joint venture in Mexico. Still, excluding its Mexican joint venture, sales were up 14%. Total sales for the year were $87.1 billion, up 14% from 2010 and up 11% without Mexican sales.

Comparable store sales rose 12% with theU.S.division posting a 10% increase and a 19% increase in its international operations. Removing gas prices and foreign currency exchange effects, comparable store sales increased 7% and 10% internationally.

For its fiscal full year, comparable store sales grew 5% domestically and 10% internationally with the total year’s comparable store sales increased 6%.

But Costco has been facing price increases across many classifications. Gross margin narrowed to 12.4% from 12.9% a year earlier. And thee company said the rising cost of inventory reduced profit by $32 million, or 4 cents a share, in its last quarter. The company reported a combined $55 million in such charges in the second and third quarters after more than two years without those expenses.

‘Without Rising Membership Fees, Costco Would Be Less Profitable’

“The margins didn’t materialize,” Brian Sozzi, retail analyst for Wall Street Strategies.  “The fee increase softens the blow, but overall it’s a really disappointing quarter.”

Starting Nov. 1, the fee increase—the company’s first since 2006—would raise annual membership to $55 from $50 for U.S. individuals, business and business add-on members as well as Canadian members. Executive membership fees in both the U.S. and Canada will rise to $110 from $100. The maximum 2% reward tied to the executive membership will rise to $750 from $500. Of its 22 million members, about half are executive members.

“Costco has done pretty well managing its merchandise costs, which make up about 89% of its costs,” said Paul Ausick of 27/7 Wall St. “But without rising membership fees, Costco would be far less profitable. Operating income grew by $362 million year-over-year, and membership fees made up nearly half of that growth. For the quarter, operating income grew by $74 million year-over-year, and membership fee growth made up $57 million of that, or 77%.”

In fact, David Strasser, an analyst for Janney Montgomery Scott LLC, reported that the fee increases may add as much as 25 cents a share to profit in this fiscal year.

Costco also reported that sales for the five weeks ended Oct 2 rose 15% to $8.61 billion. Again excluding fluctuations in gas prices and foreign currency exchanges, comparable store sales gained 8%, excluding fluctuations in gas prices and currency exchange rates.

But noting that analysts’ estimates had expected a 10% comparable store sales increase for September, 27/7’s Ausick reported: “That trend is not a good sign for the other big box stores, or indeed, for retailers in general. Only discounter Dollar General is bucking the trend in the current general economic climate.”

Last month, Costco announced that Jim Sinegal, its ceo and co-founder, will step down Jan. 1 and be replaced by current chief operating officer Craig Jelinek.