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Strategies & Market Trends : Bill Wexler's Profits of DOOM
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To: Rex Dwyer who wrote (3143)9/30/1998 2:07:00 AM
From: Bill Wexler  Read Replies (1) of 4634
 
I'll return to your question in the next two or three months. The reason being that Costco is currently undergoing some changes which will dramatically alter its operating margins and subsequent free cash flow. Most notably, the addition of the third tier of membership ("executive" member at $100 per year...$60 higher than a standard membership), and a rapid surge in sales of its higher-margin "peripheral" businesses (pharmacy, optical shops, pizza/snack bars, and now gas stations). I also need to read management's discussion about the pace of new warehouse openings.

From the reports I've received, current members are upgrading to executive memberships at the rate of about 1,000 per warehouse per week. The first year is a free trial for existing members so the extra cash will kick in in FY '99. The current membership reup rate is over 97% and since Costco customers tend to be rabidly loyal, I'm assuming that a big chunk of executive upgrades will choose to stay that way instead of reverting to standard memberships at the end of the trial period; but even assuming that only...say 25% of the upgraded members continue on, this will have a very significant impact on earnings because membership fees tend to drift down directly to the bottom line. I believe most Costco "analysts" have missed this simple and compelling point and their earnings estimates are far too low.

The next 2 10-Qs should give us better data points to plot future cash flows. I don't think investors will be disappointed to say the least!!
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