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1 Thing to Look for When Costco Reports Q2 Results

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The membership-only big-box retail store specialist is scheduled to report second-quarter results on March 3.

Costco (COST -0.96%) is scheduled to report its second-quarter fiscal year 2022 earnings on Thursday, March 3. The membership-only big-box retailer has been thriving since the pandemic onset when it was deemed an essential retailer and allowed to stay open when others had to close temporarily.

The retailer has shown that, over time, customers have appreciated the value they get when shopping at Costco. That leads into what investors should look for when Costco reports results on March 3 -- does management think it is time for a membership fee increase?

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It's about time for a membership price increase at Costco

Historically, Costco has raised its membership fee roughly every five years. Considering that interval, it is about time the company implemented another increase. After all, the last time it asked members to pay more for access to shop at its warehouses was in 2017.

Costco has two membership tiers (standard and executive). The standard costs $60 per year. The executive is $120 per year and has the benefit of 2% cashback arrangement on spending at Costco. As of Nov. 21, Costco boasted 62.5 million membership households, of which 26.5 million were executive. The overall figure was up by 800,000 from the previous quarter.

Consumers appreciate Costco's diligent efforts in providing excellent value. The strategy can be seen in Costco's consistent profit margins. Costco's sales have grown from $99 billion to $196 billion in the last decade. Meanwhile, its gross profit margin and operating profit margin have stayed relatively flat. Costco uses its growing scale and buying power to provide better value to customers rather than expand profits. It's no surprise then that Costco's first-quarter membership renewal rate came in at 91.6%.

The customer perception of the excellent value at Costco could gain increased prominence at a time of rising prices for everything from food and beverage to fuel. As if the case for a membership fee increase was not strong enough already, Amazon recently raised its fee for a Prime subscription. Costco's membership tiers are now priced below an Amazon Prime subscription. That's vital because some consumers may be choosing between the two services, and the price could be an important criterion used to decide. 

Hypothetically, if Costco increases its annual membership fee by $10, that could lead to an increase of $625 million in revenue per year (assuming 62.5 million memberships). What's more, membership fee income flows almost entirely to the bottom line as there are few expenses associated with an incremental increase. 

What this could mean for Costco investors

Analysts on Wall Street expect Costco to report revenue of $51.29 billion and earnings per share (EPS) of $2.74. If the company meets the EPS projections, it would be an increase of 28.04% from the same period the year before.

The stock is trading at a forward price-to-earnings multiple of 40.5, near its highest in the last several years, as the market perhaps is pricing in its excellent prospects. If management sounds pessimistic about its ability to implement a price increase in the near term, that could be a headwind to further rise in the stock.

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