Costco has ‘quite a bit of room’ to hike prices, membership fees: Analyst

Forrester Research Retail Analyst Sucharita Kodali weighs in on Costco's latest earnings report and its position in the wholesale club landscape amid rising membership fees.

Video transcript

- All right. Let's take a look at Costco. That stock on the move to the downside here after hours, off just about 1%. Just to remind you all, this is Yahoo Finance's Company of the Year. Digging into these results, revenue coming in at 54.4 billion. EPS a bit light in terms of what the Street was expecting. EPS totaling $3.07. The Street was looking for $3.10. Comp sales, ex gas, and FX, it was basically in line with expectations.

For more on this, we want to bring in Sucharita Kodali, Forrester Research retail analyst. Sucharita, great to have you here on Yahoo Finance. So I guess just first your initial takeaway. That miss on EPS clearly one of the reasons that we're seeing the stock trading to the downside after hours.

SUCHARITA KODALI: Yeah. I think that these are just some of the cyclical issues that even other retailers-- we heard the earlier Lululemon commentary. There could be anything from supply chain issues to higher labor costs. These are not unexpected. . I think that the bigger story when we look at it is that Costco had huge, huge gains through the pandemic. And they've held on to most of those gains. And that is one of the best things and one of the reasons that they are a Company of the Year. Earnings were a little bit soft. But I see those as cyclical issues that will likely recover in 2023 once labor costs stabilize. And the supply chain issues also normalize too.

- Hey, Sucharita. Pras here. Costco CEO told Yahoo Finance's Brian Sozzi basically that his members are actually more value conscious than they were before. What do you think that means exactly for the average Costco buyer?

SUCHARITA KODALI: Well, I think that every business is facing value conscious buyers right now. We're in an inflationary environment. Consumers are belt tightening. And you are seeing every category being very, very self conscious about pricing, about what is available, how these key value indicators are playing out for shoppers. So that doesn't surprise me. We see this in every recessionary environment.

And Costco has historically had some leverage because it tends to attract a higher income consumer. But you're seeing belt tightening across the socioeconomic strata. So it's not something that is just relegated to the dollar stores. We're seeing it at the club channel as well. What that means is that Costco is likely going to push its suppliers to give it better terms wherever possible. Costco is known for passing on its savings to shoppers. And they are likely going to push some of it to the CPGs that they do business with. And the consumer is going to have to absorb some higher pricing as well as a result of these higher costs.

- Sucharita, where do you stand just on the membership fee because this past quarter membership fees bringing in just around $1,000,000,000. That's up 5.7% year over year. So much talk has been on when Costco could potentially raise their membership fee since they haven't done that in years. Do you think that's likely as we head into the new year?

SUCHARITA KODALI: Yeah. That is seemingly something that is likely in the cards. That is a lever that they have, especially because they hadn't raised it in so long. We've seen other subscription businesses, whether it's Amazon or Netflix or others, raise their subscription fees over time as they've felt the need to improve their profitability. And what has resulted is often just consumers paying more.

And the drop off any elasticity seems to not be as much of an issue. So I suspect that Costco has quite a bit of room here to increase its fees if it chooses to do so. And especially if they are experiencing some challenges from a profitability standpoint, that's a lever they can pull.

- Hey. You mentioned Amazon. Do you think that if Costco can't effectively pass on its costs to customers or it does, do you think that Amazon can swoop in there and kind of siphon off some of those dissatisfied Costco members?

SUCHARITA KODALI: Well, we've been talking about the Costco-Amazon rivalry for some time. Perhaps Costco's biggest rival is Amazon because it also has a bundle of goods and offers, a lot of which overlap with Costco products. But then there's even more, right, because Amazon offers its Prime Video and storage and all sorts of other benefits that come with the Prime fee. And Costco doesn't have all of those benefits that Amazon has.

So if Amazon were going to siphon away those customers, I suspect it would have happened by now. What I really think is happening is that consumers, probably a number of consumers, may have actually both memberships, and they have them for different reasons. And in the case of Costco, a lot of it is the bulk purchasing. It could be the fresh rotisserie chicken for some people. Really, it's a different basket of goods that the shopper is looking for there.

- All right. Sucharita Kodali, always great to have you. Thanks so much for joining us this afternoon.