Is It Officially Time for Costco Investors to Worry?

By Motley Fool Staff Markets Fool.com

In this segment from Motley Fool Money, the team turns bearish on the business model and value proposition of wholesale retailer Costco (NASDAQ: COST)as e-commerce changes the way consumers shop.

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What rate of membership growth can be expected going forward, and what can the company do to attract new customers?

A transcript follows the video.

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This podcast was recorded on March 3, 2017.

Chris Hill: Costcosecond-quarter profitscame in lower than a year ago, and same-store salescame in lower than expected as well.Costco also announced it is raising itsannual membership fee for the first time since 2011. Jason,how much is that going to make up for the falling profits?

Jason Moser: OK, so,no offense to Mac Greer here. Mac,I love you. But I want to spend aSaturday at Costco like I want a kick in the groin, Chris. That is zero. Let's be very clear,this isn't even about me, this is about --

Jeff Fischer: It is now![laughs]

Moser: -- this is about the future generations of shoppers that are coming online here. I think, generally speaking, most of them feel the same way.I think people are assigning more value to their time today than ever before. And that's reallyone of the most beautiful things that the internet has enabled over these past 10 years. It has,not only freed up a lot of time for us andoffered a lot of convenience, but itgives us the opportunity to place more value on our time. AndI think that's one area whereCostco is really starting to show some weakness here. We look at the way comps sales are going, the way top line sales are going, it is slowing downconsiderably. Normally, you would thinkraising membership prices would elicit apositive reaction from the market. This was clearlythe opposite of what,probably, some were expecting, with the stock down. And I think that'sjustified here, because I don't know that it's reasonable to expect that they can continue to grow that membership base much more than it is today. They'll continue, I think, to dopretty well on the renewal side.

But again, the market, it's all about looking forward,tell me about what the future holds. And I think the future for Costco right now is a little bitnebulous. We look at the executive membership. That's the higher membership cost there. Executive members make up a third of overall members, but they account for two-thirds of overallspending. So, what you like to see with Costco, they like to see thoseindividual members trade up to thatexecutive membership over time. I think that's a bit of a tall order,because of significantly higher expenses there on the membership fee side. I think there's stillplenty of challenges here for Costco, and it's not a stock thatI would really look forward to owning in the next five years.

Ron Gross: I thinka lot of what you say is fair. I'm not as pessimistic,I'm not putting the nail in the coffin, and they do sell coffins, quite yet. Comp sales are still positive. They do have the power to raise prices. Retention is very strong. I agree thatcustomer acquisition is going to be a sticking point, we'll have to see. Thevalue proposition is still there,the price points in the stores are still there. But the stock has had abeautiful run over the last decade, so,not as cheap as it once was.

Moser: Yeah,let's be clear, I'm not saying Costco's days are over,I'm just looking at it from an investor's perspective. I think Costco continues to exist and do just fine. ButI think if you're looking at this from the investor'sperspective, I just don't see the catalyst, or really, the long-term trend in play here as wecontinue to shift toward e-commerce.

Fischer: Andit still has quite a premium, as Ron said, it trades around 30 times earnings. So,it's expensive. Andcoffins maybe going ...

Gross: The way of the dodo?

Moser: Yeah,everybody wants to be cremated these days, right?

Hill: Well, not yet.

Chris Hill has no position in any stocks mentioned. Jason Moser has no position in any stocks mentioned. Jeff Fischer has no position in any stocks mentioned. Ron Gross owns shares of Costco Wholesale. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool has a disclosure policy.