Costco Stock: Warehouse Club Has Great News for Investors

The warehouse club has established a value-based business model that in tougher economic times brings in new customers while it reinforces the chain's bond with current ones.

The success of that method can be seen in the sales numbers: For its most-recent quarter Costco (COST) - Get Free Report posted a 5.7% increase in U.S. same-store sales. As for average transaction size, the chain saw a slight increase globally and a 1.9% rise in the U.S., even as people made fewer big-ticket purchases.

DON'T MISS: Costco Gives Members a Gift It Doesn't Have to

The numbers that should truly impress investors are the warehouse club's membership-retention and -growth rates. Chief Financial Officer Richard Galanti spoke about those numbers during Costco's second-quarter earnings call.

"In terms of renewal rates, at second-quarter end our U.S. and Canada renewal [rate] was 92.6%, up 0.01% from Q1 end, and [the] worldwide rate came in at 90.5%, also up 0.01% from the prior quarter," he said. "Both represent all-time highs. 

"Membership growth has remained strong. We ended the second quarter with 68.1 million paid household members and 123 million cardholders, both up more than 7% versus a year earlier," 

That's all good news for Costco shareholders, but the best news might actually be something Galanti discussed much later in the call.

Costco Will Offer a Special Dividend

Costco has always paid out dividends to shareholders. That number has steadily increased, but the company has also used its cash reserves to pay special dividends on four separate occasions.

The most-recent one was a $10-a-share payout made in December 2020. Now, Galanti has made clear that even though rising interest rates mean that the company can make money on its cash balance, a special dividend is coming.

"Well, it helps a little right now. So that's good news," Galanti said of higher interest rates. "I don't think it changes our view that the special dividend, which we've done for over the last 10 1/2 years, I think, it's still an arrow in our quiver. And at some point, it's something you might see again."

Galanti did not offer a specific timetable for the shareholder payout. He sort of apologized for the omission.

"[I'm] not trying to be cute. It's kind of like the membership question. We'll let you know when we do it," he added.

Costco currently has roughly $13.5 billion in cash and cash equivalents. That's up from about $11 billion in the previous quarter.

Memberships Will Be More Expensive

Galanti also made clear that memberships will become more expensive. 

Gold membership currently costs $60 while executive membership, which comes with 2% cash back on most purchases up to $1,000 annually, costs $120. The chain also offers businesses versions of these memberships at the same prices.

The company has generally raised the cost of a membership every five years, and that deadline has passed.

"June would be our sixth anniversary. But -- and as I mentioned in the previous calls, looking at the last, I think, three, they averaged around five years and seven months, which is about now or last month," he said.

"And what we said over the last few semesters -- over the last few quarters, it was -- I'm a college kid," he said. "For the last few quarters in our view, it's a question of when, not if."

The CFO outlined how the extra cash would be spent once Costco decides to raise its membership rates. "...[Keep] in mind, that's one way that we become even more competitive. We take those monies and directly become more -- even more competitive," he said.

When Costco raises its membership rates, it has pledged to use the added cash to hold down prices on items for which its costs go up. And it'll even lower some prices.

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