Costco Wholesale (COST) delivered a strong fourth-quarter performance, exceeding revenue and EPS expectations. Key improvements were noted in membership renewal rates and executive membership growth, though overall paid membership growth slightly missed targets. The company’s value proposition and expansion plans continue to drive its business forward.
Costco Wholesale (COST) reported robust fourth-quarter results, exceeding Wall Street expectations with total revenue reaching $95.72 billion, an 11.1% year-over-year increase. Adjusted earnings per share (EPS) also surpassed estimates, rising 15% to $6.75, boosted partly by tariff refunds.
While overall revenue and EPS were strong, the market closely watched membership trends. Membership fee income grew 7.3% to $1.85 billion, slightly missing estimates. However, a key positive emerged as both worldwide and U.S./Canada membership renewal rates saw a sequential uptick compared to the prior quarter. This progress on a crucial metric provides a more optimistic outlook for the retail giant.
Despite the slight miss in membership fee income, the improvement in renewal rates is a significant development. The stock showed minimal movement in extended trading, reflecting a cautious but stable sentiment. Shares closed Thursday at $896.48, down 18% from their May 19 high, a performance mirrored by rival Walmart, which is down nearly 20% in the same period.
A primary concern for analysts has been the slowing growth rates and wobbly renewal trends in Costco's membership base. While the recent sequential improvement is encouraging, Wall Street awaits sustained positive performance before fully endorsing the stock. Nevertheless, the company's value-focused model is expected to remain attractive amidst ongoing affordability challenges, bolstering member loyalty.
CNBC's Investing Club maintains a 'hold-equivalent' rating on Costco stock, reiterating a 2 rating. However, the price target has been adjusted downwards to $1,050 from $1,100, reflecting a compression in the valuation multiples investors are willing to pay for the company's earnings. Further positive developments will be necessary to warrant a more bullish stance.
Despite a not entirely 'squeaky clean' quarter, notable positives include the improvement in membership renewal rates and growth in the higher-tier executive membership base. Executive members typically exhibit higher renewal rates than basic 'Gold Star' members. The retailer's appeal to younger shoppers is also a significant long-term advantage, as capturing this demographic is crucial for driving loyalty and increasing lifetime customer value.
However, the number of paid members, at 84.1 million, missed expectations and represented 3.8% year-over-year growth, continuing a multi-quarter trend of slowing annual expansion. Paid membership growth was 4.1% in Q3 FY26, 4.8% in Q2, and 5.2% in Q1. In contrast, executive tier memberships, priced at $130 annually compared to the $65 basic tier, reached an all-time high of 42.3 million members.
Costco's CEO, Ron Vachris, highlighted on the earnings call that renewal rates have improved, with increasing executive penetration expected to further boost these rates. The company's strategy of offering a curated selection of products at competitive prices has been a cornerstone of its success for decades, amplified by recent inflationary pressures that underscore its value proposition.
The worldwide membership renewal rate edged up to 89.8% from 89.7% in the prior three quarters. The U.S. and Canada region saw its renewal rate increase to 92.3% from 92.2%.
Vachris also noted continued growth in new member sign-ups through digital channels and among younger demographics. Members under 40 have grown nearly 60% since Covid, now comprising over a quarter of the total member base. While younger members may initially spend less, they tend to increase their spending over time.
Artificial intelligence (AI) referrals are also proving effective, particularly with the younger audience. CFO Gary Millerchip mentioned that traffic from AI search has grown triple digits for two consecutive quarters, demonstrating the highest conversion rate of all site traffic. Notably, Costco memberships themselves are frequently originating from AI searches, indicating strong positive sentiment regarding the value of the membership.
Costco's gas business achieved a record year, a significant draw for customers. CEO Vachris stated that the penetration of U.S. member households purchasing gas reached an all-time high in FY26. The company estimates it saved members over $3.2 billion on gas purchases compared to average market prices.
Total comparable sales rose 9.4% in the fiscal fourth quarter, exceeding the 9% expected. This growth was driven by a 3.3% increase in traffic and a 5.9% increase in ticket size. On an adjusted basis, excluding foreign exchange and gasoline prices, comparable sales increased 6.7%, with ticket size up 3.3%.
Digitally enabled comparable sales saw a significant jump, up 19.5% (19.8% adjusted), fueled by a 30% increase in e-commerce site and app traffic. Gross margin contracted slightly by 11 basis points year over year to 11.02%, but improved by 20 basis points excluding gas price inflation. Operating margins also improved compared to the previous year.
In terms of expansion, Costco opened 12 new warehouses in the quarter (11 excluding a relocation). For the full fiscal year 2026, 28 new warehouses were opened (25 excluding relocations). The company plans to open another 28 new locations in 2027, with five relocations. Costco currently operates 939 warehouses globally, with a strong presence in the U.S., Canada, and Mexico, alongside international operations in Europe, Asia, and Australia.
The company sees substantial opportunities for warehouse growth, including new markets and infill locations in mature areas. In fiscal 2027, Costco plans to increase capital expenditures to $7.5 billion to support its goal of 30 net new openings annually, up from $6.4 billion in FY26. Capex growth is expected to moderate from 2028 onwards.
