Members Only Still Fashionable

I like Costco. They have a lot of great stuff, at some decent prices. I also like the bizarre nature of shopping for clothes, Plasma TVs, contact lenses, Dom Perignon, bulk soap, and giant boxes of Hot Pockets. Costco also has a great reputation for taking care of their employees, in stark contrast the Walmarts reputation.

The store is frightening because I can never seem to get out of there spending less than $200.

But there's that membership fee. I used to wonder why Costco charged it. Perhaps they could do more business by dropping it. It turns out, hower, that membership fees are Costcto's profits.

Here is an abbreviated version of the earnings report Costco released today.

              CONDENSED CONSOLIDATED STATEMENTS OF INCOME
             (dollars in thousands, except per share data)
                              (unaudited)

                        12 Weeks Ended            24 Weeks Ended
                   ------------------------- -------------------------
                   February 12, February 13, February 12, February 13,
                       2006         2005         2006         2005
                   ------------ ------------ ------------ ------------

REVENUE
 Net sales         $13,784,810  $12,412,578  $26,449,609  $23,752,522
 Membership fees       269,766      245,499      532,320      483,558
                   ------------ ------------ ------------ ------------
  Total revenue     14,054,576   12,658,077   26,981,929   24,236,080

                   ------------ ------------ ------------ ------------
NET INCOME         $   296,203  $   305,452  $   512,021  $   498,605
                   ============ ============ ============ ============

_


Net income for each of the periods reported correlates closely with net membership fees. In other words, without the membership fee, Costco just breaks even.

It makes it difficult for Walmart to compete with Costco on price, since Costco only needs to cover their costs with merchandise prices, rather get profit from them, as well.