Revenue was up 5.7 percent but missed analysts’ expectations. Other looming concerns include the proposed border adjustment tax that would hit importers hardest.
Costco is raising its membership fees, a move that should help boost its bottom line, even as the Issaquah warehouse giant on Thursday reported disappointing second quarter earnings.
The $5 to $10 membership-fee hike, which the company said would affect 35 million members, has been expected for some time. Costco said in March last year that it was considering raising its membership fees — something it does every five to six years. The last time the membership fee was increased in the U.S. was in late 2011.
Membership fees make up only a small percentage of Costco’s revenues — just 2?percent in the second quarter. But those fees contribute significantly to Costco’s bottom line.
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Around 70 percent of Costco’s operating profit comes from membership fees, a Morningstar analyst estimated last year.
Richard Galanti, Costco’s chief financial officer, said in a conference call with investors Thursday that the membership-fee hike would have only a minor effect on earnings in June, when the increases kick in but should boost net income over the next two years.
That’s good news for the warehouse chain, whose shares fell more than 4?percent in after-hours trading after the earnings report was released.
The company reported revenue of $29.77 billion, up 5.7 percent from the same quarter a year ago but short of the $29.86?billion Wall Street analysts were expecting, according to Reuters.
Earnings per share were $1.17, below the $1.24 of the year-ago quarter, and also below analysts’ expectations of $1.36.
Galanti said lower gas profit than in the comparable period a year ago was the main culprit for lower earnings in the quarter.
During the conference call Galanti touched on a number of issues including the company’s slow but growing move online and what it thinks of a possible GOP import-tax proposal.
The company has expanded the variety of merchandise available on its website, has been working with Google and Instacart, and is testing other delivery options, Galanti said.
Costco’s online sales, though still only about 4?percent of revenue, are growing, he added. Regardless, “We’re still a brick-and-mortar entity and we still want to get you into the store because you buy more when you’re there.”
On a potential GOP import-tax plan — the so-called “border adjustment tax” — that a major investment bank has said could hit Costco hard, Galanti said it’s still unclear whether it would move forward.
But “we don’t believe it’s good for consumers. It’s going to raise prices,” said Galanti.
Costco has joined Americans for Affordable Products, a coalition of retailers and retail-trade associations that also includes rivals Wal-Mart and Target, in fighting the Republican proposal.
That proposal would lower the corporate income-tax rate and exclude export profits from taxation. But companies would no longer be able to deduct the cost of imported goods when they are calculating the profits they are taxed on.
“We personally don’t buy into the fact that [not being able to deduct import costs] will be offset by a big rising dollar. And we don’t know what’s going to happen with the retaliation out there by other countries,” Galanti said. “As a retailer, we definitely think it’s bad and we’re against it.”
The membership-fee increase, which takes effect June 1, is $5 for U.S. and Canada Gold Star (individual), Business, and Business add-on members.
Those members, who now pay $55 a year, will be paying $60 starting in the summer.
Executive Membership fees in the U.S. and Canada will go up $10 from $110 to $120, also starting June 1. And the cap for the annual 2 percent reward associated with the Executive Membership will increase from $750 to $1,000.