Membership to shop
In contrast to conventional retailers (XLY) like Gap (GPS) and L Brands (LB), a membership card is required to shop at Costco Wholesale (COST). Costco’s Gold Star and Business members pay a fee of $55 per year for the card, and in return, members can shop for both brand-name and private-label products in bulk at relatively competitive rates.
Costco also offers an executive membership to existing Gold Star and Business members at an additional upgrade fee of $55 a year. Executive members get 2% cash back on select purchases, subject to a maximum of $750.
Membership income growth
Costco’s membership revenue rose by 3.6% YoY (year-over-year) to $603 million in the second quarter of fiscal 2016, which ended February 14. In constant-currency terms, membership fees were up by 7%. The company’s renewal rates came in at ~91% in the US and Canada, and 88% in other international countries, with new memberships rising by ~4% in the second quarter globally. The company attributed part of the increase to a membership promotion in LivingSocial during the quarter, according to Chief Financial Officer Richard Galanti.
By contrast, Sam’s Club (WMT) reported an increase of 5.6% in membership income in the quarter ending January 31, 2016.
Gold Star, executive memberships rise
Costco’s increase in membership income was spurred by higher memberships. Costco’s paid memberships rose by about 0.7 million in the quarter, spurred by higher Gold Star memberships. Gold Star memberships, which are offered to individuals, cost $55 per year in the US. By contrast, Executive memberships were up by about 0.2 million to 16.6 million in the quarter, according to Galanti.
While they’re a relatively smaller fraction of the company’s total cardholders, Executive members still account for about two-thirds of Costco’s sales. As such, they’re a vital growth driver for Costco. That said, how could the retailer’s profitability have fallen in fiscal 2Q16? Read the next part of this series to find out.