Costco  (COST) – Get Free Report shares slipped Tuesday after the giant warehouse-club retailer shocked investors by unveiling the departure of one of its most-respected executives.

Costco has steadily improved its sales growth as shoppers seek cheaper grocery alternatives, amid the fastest inflation rates in a decade. They’re willing to pay between $60 and $120 a year for the privilege.

Membership fees, in fact, translate to one of the group’s most-important profit drivers, generating around $1.08 billion in sales over the three months ended in October. That’s an 8.2% increase from a year earlier, generated by around 130 million Costco Club cardholders. 

That’s still only a small portion of the group’s $57.8 billion in fiscal-first-quarter revenue, but the profit margin from those sales is, of course, exceptionally wider than its overall gross margin of around 11%.

Membership fee income is estimated to account for around 52% of Costco’s annual earnings, down from around 68% in 2019.

Attracting new customers while retaining current ones with high-value products and a selection that justifies the cost of membership is a huge logistics and accounting challenge for Costco. The company nonetheless has won a huge amount of respect for investors for its success.

Costco shares have more than tripled (up 230%) over the past five years, firmly outpacing the 83% gain for the S&P 500 and the 77% advance for Walmart  (WMT) – Get Free Report over the same period. 

But one of the key architects of that strategy, and its investor-facing voice, is set to leave the company next month.

Costco CFO Galanti is stepping down

Richard Galanti, who has served as Costco’s chief financial officer since 1993, will step down in March, the company said Tuesday, with his opposite number at grocery giant Kroger  (KR) – Get Free Report, Gary Millerchip, named to succeed him.

“Over his nearly 40-year tenure as chief financial officer at the company, Richard has made innumerable and invaluable contributions to its success,” Chief Executive Ron Vachris said in a statement.

“He is widely known, admired and respected among our shareholders, employees, business partners and others. We express our deepest gratitude for his long and loyal service.” 

Galanti, who has led Costco’s investor presentations and earnings calls for several years, will remain with the group until January 2025 to help with Millerchip’s transition.

Millerchip, who has led Kroger’s finance team since 2019, will join Costco at a challenging time, with slowing inflation and a resilient economy likely to support sales at discretionary rivals such as Target  (TGT) – Get Free Report and Walmart  (WMT) – Get Free Report.

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Costco’s so-called core-on-core profit margins, which exclude fuel sales and foreign-exchange impacts, are also starting to narrow. Over the October 2023 quarter they were only 5 basis points (0.05 percentage point) wider than 2022 levels.

That, alongside club revenue modestly missing Wall Street expectations, could compel the group to lift the cost of its membership fees for the first time in nearly seven years.

When, not whether, on membership-fee increase

D.A. Davidson analyst Michael Baker, who carries a ‘neutral’ rating with a $600 price target on Costco stock, sees a fee increase on the horizon.

“Membership trends remain strong, including renewals, new member sign ups and the mix towards higher tier members,” he said in a recent client note. “This all makes it easier for COST to implement an increase.”

Galanti, for his part, was noncommittal when he spoke to investors on the group’s first-quarter-earnings call in December. 

“We haven’t needed to do it,” Galanti said. “We like providing extreme value. Certainly, while we’ve gone a little longer than the average increase, we feel we certainly have driven more value to the membership.”

“I’ll use my standby answer, my pat answer, it’s a question of when, not if,” he added. “But at this juncture, we feel pretty good about what we’re doing.”

Millerchip might be tempted to raise membership fees, but it’s doubtful he’ll wish to tinker with the group’s famous hot dog and soda combination, which has been pegged at $1.50 since 1985.

Galanti, in fact, told investors in 2022 that that price would stay in place “forever.”

Costco shares were marked 0.66% lower in early Tuesday trading to change hands at $706.50 each, trimming the stock’s six-month gain to around 26.5%.

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