'We believe the stock underperforms on a "sell-the-news" dynamic,' D.A. Davidson notes
Shares of Costco are up around 29% so far this year.
When Costco Wholesale Corp. announced a membership-fee increase for its shoppers late Wednesday, investors who had been eager for such a move cheered the news. Yet on Thursday, the stock fell.
Some analysts, however, said such a reverse tends to happen after Costco's fee hikes, as investors take profits after months or years of anticipation.
"The last three times [Costco] announced a fee increase, the stock reaction the next day averaged a down-2.4% move, trading down on each of the last three fee increases," D.A. Davidson analyst Michael Baker said in a research note on Wednesday. "We believe the stock underperforms on a 'sell-the-news' dynamic."
In fact, shares of Costco lost 4.3% on Thursday. The stock is still up 28.3% so far this year, and has run steadily higher since the pandemic on solid sales growth, investments in e-commerce and, to some degree, anticipation of the fee hike announced on Wednesday.
Stifel analysts have also noted that Costco's stock has generally outpaced the S&P 500 SPX ahead of prior membership-fee hikes. But afterward, they said, shares have tended to trail the index, as markets reconcile higher expectations for the bottom-line benefits that might come from charging members more.
Costco on Wednesday said that starting on Sept. 1, it would raise its annual fee to $65 for its individual Gold Star and business members in the U.S. and Canada. Premium "executive" memberships in the U.S. and Canada will rise to $130 on that date.
The decision to raise fees will affect some 52 million members and marks Costco's first membership-fee increase since 2017. Historically, Costco has raised those fees every five years or so.
Wall Street analysts were still optimistic about the fee increase despite Thursday's selloff and broader concerns about shoppers' struggles with inflation over the past two years. They said the extra fees would help Costco's profits and allow it to bring in more products at lower prices.
Some also suggested that the question over whether its share price had peaked, after a four-year march higher, was the wrong one to ask.
"Now, the question is with this catalyst behind the stock, will this mark a near-term peak?" UBS analyst Michael Lasser said in a note on Thursday. "We think that view misses that this is how [Costco's] model works. It uses its fees to invest in and subsidize the high-quality merchandise it sells.
"Thus, having this incremental profit roll in will provide fuel to power its model," Lasser continued. "Besides, we think the timing and the magnitude of the increase was largely anticipated by the market."
Costco executives had described a fee hike as a matter of when, not if, as they weighed the state of the U.S. economy and its consumers after inflation raised fears of a downturn.
Jefferies analysts on Thursday noted that it is Costco's eighth increase in 40 years, and arrives at a time when "inflation has essentially been zero for the company for three quarters now." New U.S. government data on Thursday showed that prices overall fell for first time since 2020.
D.A. Davidson's Baker said the higher fees would add around $377 million in total revenues over 24 months. Costco made around $1.1 billion in membership fees in its fiscal third quarter.
Other analysts said Costco's bump in membership fees could push similar fees higher at rivals. William Blair analysts said that Costco's announcement on Wednesday "will likely precede a similar announcement" from BJ's Wholesale Club.
