Costco makes progress on a key membership metric. Here’s our new price target on the stock
Costco Wholesale reported better-than-expected fourth-quarter results on Thursday night, but the numbers were not strong enough to silence the debate around membership trends and the retailer’s growth outlook. Total revenue in the August quarter increased 11.1% year over year to $95.72 billion, ahead of Wall Street expectations of $94.86 billion, according to estimates compiled by LSEG. Adjusted earnings per share (EPS) in the 16-week period rose 15% to $6.75, ahead of expectations, LSEG data showed. The EPS figure still beat consensus when stripping out a 15-cent benefit resulting from tariff refunds, thanks to the Supreme Court ruling in February that President Donald Trump’s emergency levies were unconstitutional. Membership fee income in the quarter grew 7.3% to $1.85 billion, slightly below the FactSet estimates of $1.86 billion. Both worldwide and U.S./Canada membership renewal rates ticked higher compared with the prior quarter. The stock is little changed in extended trading Thursday, up less than a quarter of a percent. Shares finished Thursday’s regular session at $896.48, down 18% from their May 19 closing high. Rival Walmart is down almost 20% in that same stretch. One of the primary question marks around Costco in recent quarters has been slowing membership growth rates and wobbly renewal trends. We’ve been concerned about this too, especially considering the stock’s premium valuation leaves little room for error. Despite the sequential improvement in membership renewal rates, Wall Street will need to see a few more solid results on this front before deciding Costco is out of the woods. That said, we saw enough that we’re comfortable sticking with the name down here, especially against the backdrop of ongoing affordability headwinds, which should keep Costco members wanting to shop at a store known for its value. We therefore reiterate our hold-equivalent 2 rating, but lower our price target to $1,050 from $1,100. The multiple that investors are willing to pay for Costco’s earnings has compressed, and we need to see some follow-through before getting more positive on the stock. COST YTD mountain Costco’s year-to-date stock performance. Bottom line This was not a squeaky clean quarter, but there were several notable positives. Chief among them: an improvement in membership renewal rates and growth in the higher-tier executive membership base; executive members typically renew at a higher rate than basic “Gold Star” members. We’re also pleased to see that Costco memberships are resonating with younger shoppers because capturing customers young is a key factor in driving loyalty and, in turn, higher lifetime customer value. At the same time, younger members are more likely to sign up for their membership online, and online sign-ups tend to churn at a higher rate than those who sign up in the store. This means that Costco’s resonance with younger shoppers is key to the broader debate around membership. On the other hand, paid members of 84.1 million missed expectations and represented 3.8% year-over-year growth โ continuing a multi-quarter stretch of slowing annual growth. Paid membership grew 4.1% , 4.8% and 5.2% in the third, second and first quarters of Costco’s fiscal 2026. Though overall paid memberships missed, executive tier memberships, which cost $130 per year, versus the $65 basic tier, increased to 42.3 million, an all-time high. On the call, CEO Ron Vachris said, “Renewal rates showed improvements again this quarter, with the increasing executive penetration likely to help improve those rates in the future.” Why we own it Costco is the best-run retailer in the world, with a business model focused on offering its members a relatively small universe of products at hard-to-beat prices. It has succeeded for decades, but the high inflation of recent years has made the company’s value-focused ethos really shine. Nevertheless, questions about membership trends and growth as its footprint matures have weighed on the stock’s recent performance. Competitors: BJ’s Wholesale , Walmart , fellow Club holding Amazon Last buy: Sept. 30, 2025 Initiation date: Jan. 27, 2020 The worldwide membership renewal rate managed to tick up slightly to 89.8%, up from the 89.7% rate we’ve seen in the prior three quarters. The U.S./Canada region renewal rate also ticked up to 92.3%, up from 92.2% in the prior quarter. “Growth in new member signups through digital channels and younger members also continued. Looking over a longer time horizon, our member base under 40 has grown nearly 60% since Covid, increasing our total penetration of members under 40 to more than a quarter of our total base. … “While these younger members start out spending a little less with us, over time, they grow into higher spending members.” Costco is finding success from artificial intelligence referrals, which could help with the younger audience. On the call, CFO Gary Millerchip said, “While starting from a low base relative to other channels, AI continues to grow in its influence on how our members are searching for products. Traffic to our site from AI search grew triple digits for the second consecutive quarter, and continues to show the highest conversion rate of all site traffic…. Interestingly, the Costco membership is also among the top items originated from AI searches, indicating that there is a strong positive sentiment around the value of our membership coming from these sources.” Costco’s gas business had a record year, CEO Ron Vachris said on the earnings call. That’s hardly a surprise considering what happened to prices at the pump this year following the breakout of the Iran war on Feb. 28. “In fiscal year 26, we saw the penetration of U.S. member households that purchased gas reach an all-time high. During the fiscal year, we estimate we saved our members over $3.2 billion versus the average price at the pump in markets where we operate,” Vachris said. Recall, while the gas business is barely profitable, it is nonetheless a crucial part of the Costco business model because it draws customers to the warehouse. Once there, many opt to do some shopping, and if you’ve ever been to Costco, then you know, you almost always end up walking out with more than planned. Total comparable sales rose 9.4% in the fiscal fourth quarter, ahead of the 9% expected, according to estimates compiled by FactSet. Comparable sales, or comps, is a key metric for the retail industry that adjusts for new store openings and closings to ensure fair year-over-year comparisons. Comps were driven by a 3.3% increase in traffic and a 5.9% increase in ticket size. Though we’ll take the beat, it must be noted that on an adjusted basis, which strips out the effects of foreign exchange and gasoline prices, comps increased 6.7%, and ticket size was only up 3.3% versus the year-ago period. Digitally enabled comparable sales were up 19.5% โ or 19.8% on an adjusted basis โ as e-commerce site and app traffic increased 30% versus the prior-year period. Gross margin contracted 11 basis points year over year to 11.02%. However, it was actually up 20 basis points when excluding the impact of gas price inflation. Operating margins improved from the year-ago period. Finally, Costco opened 12 new warehouses in the quarter, or 11 when excluding a relocation in Taiwan. For the full fiscal 2026, Costco opened 28 new warehouses, or 25 when excluding three relocations. The team plans to open another 28 new locations in 2027, while relocating five more. Costco currently has 939 locations worldwide, most of which are in the U.S., Canada, and Mexico. In addition to North America, the company also has representation in Europe, Asia, and Australia. “We continue to see significant opportunities for new warehouse growth,” Vachris said, calling out new markets like Buffalo, New York, and Lawrence, Kansas, and infills in more mature U.S. markets. “We’re confident in the return on investment in all the buildings that we open, with the new markets bringing more new members, and the infills driving many fewer new sign-ups, but a much quicker maturity curve for sales and profitability.” Costco plans to spend $7.5 billion in fiscal 2027 on capital expenditures to support its goal of getting to 30 net new openings a year, which would be up from $6.4 billion in now-concluded FY26. Millerchip said that starting in 2028, the pace of capex growth should slow. (Jim Cramer’s Charitable Trust is long COST. See here for a full list of the stocks.) 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