Table of Contents
Company Overview & Strategic Position
Costco Wholesale Corporation operates the third-largest retailer globally and the undisputed leader in warehouse club retail, with 923 locations across 14 countries serving 81.4 million paid members. Unlike traditional retailers that rely on product markups, Costco has perfected a counter-intuitive model: sell merchandise at near-cost and generate operating income from membership fees.
The formula is deceptively simple. Members pay $65 annually (Gold Star) or $130 (Executive) for bulk purchasing at wholesale prices. Costco marks up products just 11-14% versus 25-50% at traditional retailers. This creates a flywheel: lower prices drive volume, enabling better supplier terms, allowing even lower prices, attracting more members. Membership fees—just 2% of revenue—delivered $1.33 billion in Q1 at 90%+ margins, generating profitability that 11.3% gross margins cannot. Executive members (48.7% of base) drive 74.3% of sales, creating a high-value, sticky cohort.
Costco's moat rests on three pillars: (1) scale advantages ($269.9B FY2025 revenue makes it #3 globally behind Walmart and Amazon), (2) a self-reinforcing membership model with 89.7% worldwide renewal rates (92.2% US/Canada), and (3) fanatical focus on value that builds customer loyalty competitors can't replicate. The company operates in three segments: US (629 warehouses, 68% of sales), Canada (110, 17%), and Other International (184 in Mexico, Japan, UK, Korea, Taiwan, Australia, Spain, France, Iceland, New Zealand, Sweden, China). Digital sales grew 20.5% year-over-year as e-commerce becomes a meaningful channel.
The strategic challenge: evolution without revolution. In an era of instant delivery and algorithmic recommendations, Costco's answer is don't compete on convenience—compete on value so extreme that members drive 20 minutes for a $4.99 rotisserie chicken and leave with $300 in unplanned purchases. Q1 FY2026 tested this: comp sales grew 6.4%, digital surged 20.5%, membership income jumped 14%. But the stock barely moved despite beats. Wall Street's question: can $65 annual fees and bulk toilet paper sustain 92% renewal rates and 52x P/E valuation in a world of Amazon Prime and Walmart+? Or is the warehouse model a slowly melting ice cube in the age of algorithmic retail?
Key Highlights
Net sales $65.98B beat estimates by modest margin
EPS $4.50 topped consensus $4.27 driven partly by tax benefit
Membership income surged 14% to $1.33B on fee increase momentum
Digital sales exploded 20.5% as e-commerce strategy gains traction
Renewal rates slipped 10bps worldwide to 89.7% (first decline in years)
Core EPS growth of 13.6% excluding tax benefits shows underlying strength
Stock reaction muted at -0.26% despite beats across the board
Revenue & Growth Analysis
Q1 FY26 vs Estimates:
Metric | Q1 FY26 Actual | Consensus Est. | Variance | Beat/Miss |
|---|---|---|---|---|
Net Sales | $65.98B | $67.14B | -$1.16B (-1.7%) | MISS |
Diluted EPS | $4.50 | $4.27 | +$0.23 (+5.4%) | BEAT |
Core EPS (ex-tax) | $4.34 | $4.27 | +$0.07 (+1.6%) | BEAT |
Membership Income | $1.329B | ~$1.30B (implied) | +$29M (+2.2%) | BEAT |
Comparable Sales | +6.4% | ~+5.5-6.0% (expected) | +40-90bps | ABOVE |
Gross Margin | 11.32% | 11.28% (flat YoY) | +4bps | BEAT |
⚠️ MIXED RESULTS: Costco beat EPS estimates by 5.4% and exceeded expectations on membership income, gross margin, and comparable sales. However, the revenue miss of $1.16B (-1.7%) versus consensus is notable. The beat was primarily driven by better-than-expected profitability (margin expansion + tax benefit) rather than sales outperformance.
Revenue Trend - Last 4 Quarters:
Quarter | Net Sales | QoQ Growth | YoY Growth | Comp Sales | Trend |
|---|---|---|---|---|---|
Q2 FY25 (12 weeks) | $62.53B | - | +9.1% | +5.8% | Baseline |
Q3 FY25 (12 weeks) | $63.21B | +1.1% | +8.0% | +6.6% | ↗ Comp accel. |
Q4 FY25 (16 weeks) | $84.40B | +33.5%* | +8.0% | +5.4% | ↘ Comp decel. |
Q1 FY26 (12 weeks) | $65.98B | -21.8%* | +8.2% | +6.4% | ↗ Reaccel. |
*Q4 is a 16-week quarter vs 12-week standard quarters, causing seasonal QoQ volatility
Key Observation: Comparable sales accelerated from +5.4% in Q4 FY25 to +6.4% in Q1 FY26, the strongest growth in 3 quarters. YoY revenue growth of +8.2% is steady, while comp sales momentum is improving—a positive sign for underlying business health.
Comparable Sales Breakdown by Geography:
Segment | Comp Sales | Traffic | Ticket | Adjusted Comp* |
|---|---|---|---|---|
United States | +5.9% | +2.6% | +3.2% | +5.9% |
Canada | +6.5% | +5.0% | +1.4% | +9.0% |
Other International | +8.8% | +3.1% | +5.5% | +6.8% |
Total Company | +6.4% | +3.1% | +3.2% | +6.4% |
*Adjusted = excluding gas price and FX impacts
Key Growth Drivers:
1. Digitally-Enabled Sales Surge (+20.5% YoY):
E-commerce site traffic: +24%
Average order value: +13%
Top online categories: Pharmacy, Gold/Jewelry, Tires, Small Electronics, Apparel, Major Appliances
Digital enhancements: Personalized recommendations, improved product pages, enhanced search
2. Traffic Acceleration (+3.1% YoY):
Member traffic growth of 3.1% represents steady improvement from recent quarters, driven by extended operating hours (providing ~1% sales lift according to management) and new warehouse openings (7 net new in Q1).
3. Ticket Growth (+3.2% YoY):
Average ticket increased 3.2%, reflecting low-single-digit inflation in food/fresh and nonfoods, partially offset by gasoline price deflation. Adjusted for gas and FX, ticket growth held steady at 3.2%.
✓ ACCELERATING: Comparable sales accelerated from +5.4% in Q4 FY25 to +6.4% in Q1 FY26, showing strengthening momentum heading into the fiscal year. Digital growth at +20.5% far outpaces total company growth, validating omnichannel investments.
Geographic Performance Deep Dive:
Canada outperformed with +9.0% adjusted comp sales (excluding gas/FX), driven by exceptional +5.0% traffic growth—the strongest of any region. This suggests Canada membership fee increases (implemented earlier) are not dampening traffic.
Other International delivered +8.8% reported comps but saw significant FX headwinds, with adjusted growth of +6.8%. Strength in Mexico and Asia offset weakness in Europe where new warehouse openings in France (Mulhouse on 11/20/25) are still ramping.
United States at +5.9% comp sales represents the slowest growth geographically, though traffic of +2.6% remains healthy. The lower ticket growth (+3.2% vs +5.5% internationally) reflects different inflation dynamics and product mix.
Profitability & The $72 Million Tax Gift
🚨 CRITICAL ONE-TIME ITEM: Q1 FY2026 results included a $72 million tax benefit ($0.16 per diluted share) related to stock-based compensation deductions. While management presents this as a recurring item, it is inherently variable and timing-dependent. Last year's Q1 included a $100 million benefit ($0.22/share), making year-over-year comparisons misleading without adjustment.
Reported vs Core Earnings:
Metric | Q1 FY26 | Q1 FY25 | YoY Growth |
|---|---|---|---|
Reported Net Income | $2,001M | $1,798M | +11.3% |
Reported Diluted EPS | $4.50 | $4.04 | +11.4% |
Tax Benefit (Stock Comp) | $72M ($0.16) | $100M ($0.22) | -$28M (-$0.06) |
Core Net Income (ex-benefit) | $1,929M | $1,698M | +13.6% |
Core EPS (ex-benefit) | $4.34 | $3.82 | +13.6% |
The Verdict on the "Beat": Costco beat consensus EPS of $4.27 by $0.23, but $0.16 of that beat came from the tax benefit. Core EPS of $4.34 represents a more sustainable $0.07 beat. More importantly, core EPS growth of +13.6% significantly exceeded reported growth of +11.4%, demonstrating accelerating underlying profitability.
Margin Analysis:
Metric | Q1 FY26 | Q1 FY25 | Change (bps) | Commentary |
|---|---|---|---|---|
Gross Margin | 11.32% | 11.28% | +4 | Slight improvement (gas impact: 0bps) |
Merchandise Costs/Sales | 88.68% | 88.72% | -4 | Lower costs as % of sales |
SG&A Expense Ratio | 9.60% | 9.59% | -1 | Deleveraging (wages, healthcare) |
Pre-Opening Expense | Included | Included | -1 | 7 new warehouses vs prior year |
Operating Margin | 3.73% | 3.61% | +12 | Limited leverage on 8% revenue growth |
Operating Income $ | $2,463M | $2,196M | +12.2% | Dollar growth outpaces margin expansion |
Note: Gross margin change of +4bps had 0bps impact from gasoline prices (per management). All improvement came from core merchandising and ancillary businesses.
Gross Margin Breakdown (+4bps):
Core margin: +0 bps (steady execution on merchandising)
Core on core sales basis: +30 bps (favorable as revenue mix shifts)
Ancillary businesses: +7 bps (gas, pharmacy, optical contributing)
Central operations: +3 bps (efficiency gains)
LIFO adjustment: -3 bps (inventory accounting headwind)
Equity compensation: +2 bps
SG&A Deterioration (-1bp):
The 1 basis point increase in SG&A as a percentage of sales (-1bp = worse, despite the confusing notation) reflects investments in digital capabilities, IT infrastructure, and wage increases. Pre-opening expenses for 7 new warehouses added another -1bp headwind.
⚠️ CONCERN: While gross margin improved +4bps, SG&A deterioration and pre-opening costs consumed half of that gain. Operating margin expansion of just +10bps (implied) on +8.2% revenue growth suggests limited operating leverage. Costco's business model deliberately sacrifices margin expansion for volume growth, but investors should watch for signs that expense growth is outpacing revenue gains.
Financial Position & Cash Generation
Balance Sheet Snapshot (as of November 23, 2025):
Metric | Q1 FY26 | Q4 FY25 | Q1 FY25 |
|---|---|---|---|
Cash & Equivalents | ~$16.0B | $17.2B | $14.2B |
Total Debt | ~$6.5B | $6.5B | $6.5B |
Net Cash Position | +$9.5B | +$10.7B | +$7.7B |
Working Capital | Negative | Negative | Negative |
Cash Flow Performance:
Metric | Q1 FY26 | Q1 FY25 | YoY Change |
|---|---|---|---|
Operating Cash Flow | $4,688M | ~$4,100M | +14.3% |
Capital Expenditures | $1,526M | ~$1,400M | +9.0% |
Free Cash Flow | $3,162M | ~$2,700M | +17.1% |
FCF Margin | 4.8% | 4.4% | +40 bps |
Capital Allocation:
Costco generated $3.16 billion in free cash flow in Q1 FY2026, representing 4.8% FCF margin—a 40 basis point improvement year-over-year. The company returned capital to shareholders through:
Quarterly dividend: Costco paid a regular quarterly dividend (amount not disclosed in Q1 release but historically ~$1.16/share or ~$515M total)
Share repurchases: Modest opportunistic buybacks
CapEx investments: $1.53B invested in new warehouse openings, remodels, IT infrastructure, and digital capabilities
Warehouse Expansion:
Region | Q4 FY25 Count | Q1 FY26 Openings | FY26 Rest of Year Plan | FY26 Year-End Target |
|---|---|---|---|---|
United States | 629 | 4 | 16 | 649 |
Canada | 110 | 2 | 3 | 115 |
Other International | 175 | 1 | 2 | 178 |
Total | 914 | 7 | 21 | 942 |
Q1 New Openings:
Mulhouse, France (11/20/25) - First location in this market
Vancouver, BC Business Center (11/14/25) - Specialized format for businesses
5 additional US locations
FY2026 Expansion Target Revision: Management revised full-year warehouse openings to 28 (from prior 30+) due to permitting delays in Spain. This represents 3.1% unit growth, consistent with Costco's historical 20-30 openings annually.
✓ FORTRESS BALANCE SHEET: Costco maintains a net cash position of $9.5 billion with minimal debt ($6.5B), providing enormous financial flexibility. The negative working capital model (getting paid by customers before paying suppliers) acts as an interest-free loan that scales with revenue growth. Strong FCF generation of $3.16B in Q1 alone puts Costco on track for $10-11B annual free cash flow.
Forward Outlook & Guidance
Costco does not provide formal quarterly or annual guidance, instead offering directional commentary on key business drivers. Here's what management indicated for the coming quarters:
Metric | Recent Trend | Q2 FY26 Direction | Commentary |
|---|---|---|---|
Comparable Sales | +6.4% Q1 | → Steady | December trends continuing strong per early-month sales reports |
Traffic Growth | +3.1% Q1 | → Steady | Extended hours and new warehouses supporting traffic |
Digital Growth | +20.5% Q1 | ↗ Accelerating | AI enhancements, personalization driving e-commerce momentum |
Membership Fees | +14% Q1 | ↗↗ Strong | Fee increase fully anniversaried, executive membership penetration rising |
Renewal Rates | 89.7% (-10bps) | ↘ Watching | First decline in years—needs monitoring |
Gross Margin | 11.32% (+4bps) | → Flat to +5bps | Stable merchandising margins, mix shift to ancillary businesses |
SG&A Ratio | 9.60% (-1bp worse) | → Flat to -5bps | Wage increases, digital investments pressuring leverage |
Warehouse Openings | 7 in Q1 | → Steady | 21 remaining in FY26 (28 total vs 30+ original plan) |
✓ POSITIVE MOMENTUM: Comparable sales trends remain healthy, with traffic growth of 3.1% showing members are visiting stores more frequently. Digital sales growth of 20.5% demonstrates Costco is successfully competing in omnichannel retail without sacrificing its warehouse-first model. Membership fee increases have not dampened renewal rates significantly (down just 10bps).
⚠️ CONCERNS TO MONITOR: Renewal rate decline of 10 basis points to 89.7% worldwide (and 92.2% US/Canada) represents the first meaningful deterioration in years. While still industry-leading, this bears close watching as membership fee increases cycle through the base. SG&A expense ratios are not improving despite strong revenue growth, suggesting limited operating leverage. Inflation in food/fresh categories remains "low-mid single digits" per management, providing tailwinds that may not persist.
Management's Key Initiatives for FY2026:
AI Integration: Pharmacy operations now using AI to achieve 98% in-stock rates (vs industry average ~90%)
Pre-Scan Technology: Piloting systems that improve checkout speed by 20%
Personalization: Website now offers personalized product recommendations based on purchase history
App Enhancements: Improved mobile experience driving higher conversion rates
Extended Hours: Delivering ~1% sales lift in locations with longer operating hours
Health Care Expansion: Growing faster than sales but creating near-term margin pressure
Inflation Outlook:
Management indicated inflation running at "low single digits" in nonfoods and "low-mid single digits" in food and fresh categories. This represents moderation from pandemic-era peaks but still provides pricing tailwinds. Gasoline prices showed deflation year-over-year, creating headwinds to total sales growth but improving the "ex-gas" comparisons.
Management Commentary & Red Flags
CEO Ron Vachris on Digital Strategy:
"We're seeing tremendous momentum in our digitally-enabled sales, up over 20%. Our investments in personalization, improved product display pages, and search capability are paying off. Members are discovering products online and either ordering for delivery or adding to their warehouse shopping lists."
→ Translation: Costco is finally cracking the omnichannel code. E-commerce growth of 20.5% proves members want convenience without sacrificing the warehouse experience. The key insight: use digital to drive warehouse traffic (shopping lists, pre-ordering) rather than replace it.
CFO Gary Millerchip on Membership Fee Increases:
"The membership fee increase we implemented in the U.S. and Canada is now fully reflected in our results. We're pleased with the strong 14% growth in membership fee income and stable renewal rates at 92.2% in those markets."
→ Translation: The September 2024 fee increase ($5 for Gold Star to $65, $10 for Executive to $130) initially spooked investors worried about churn. One year later, renewal rates barely budged (down just 10bps), validating Costco's pricing power. The $1.33B in quarterly membership income at 90%+ margins drives profitability.
On AI and Technology Investments:
"We're using AI in our pharmacy operations and achieving 98% in-stock rates. Our pre-scan technology pilots are improving checkout speed by 20%. These aren't flashy initiatives, but they're delivering real value to members."
→ Translation: Costco is deploying AI for operational efficiency, not gimmicks. A 98% pharmacy in-stock rate (vs ~90% industry average) means fewer member complaints and higher sales per square foot. Faster checkouts improve the member experience, driving renewal rates.
On Holiday Performance (Thanksgiving/Black Friday):
"We sold over 4.5 million pumpkin pies in the three days around Thanksgiving—that's over 7,000 pies per warehouse. Black Friday saw record nonfood e-commerce orders exceeding $250 million."
→ Translation: Costco's treasure hunt model (limited SKUs creating urgency) works especially well during holidays. The $250M+ in nonfood e-commerce on Black Friday alone demonstrates digital is becoming a meaningful sales channel, not just a side project.
What They DIDN'T Say - Red Flags:
⚠️ RED FLAG #1 - Renewal Rate Decline: Management glossed over the 10 basis point decline in worldwide renewal rates (89.7% vs 89.8% last year) and US/Canada rates (92.2% vs 92.3%). While still industry-leading, this represents the first meaningful decline in years and coincides with membership fee increases. Are price-sensitive members not renewing?
⚠️ RED FLAG #2 - Operating Leverage Absent: Despite +8.2% revenue growth and +6.4% comp sales, operating margins expanded just ~10 basis points (implied). SG&A deleveraged by 1bp, pre-opening costs added 1bp, consuming half the gross margin gains. Where's the scale advantage if expenses are growing as fast as sales?
⚠️ RED FLAG #3 - Health Care Cost Headwind: Management mentioned health care costs are "growing faster than sales" in the first quarter. This represents a new headwind not present in prior quarters. With wage pressure already evident, rising benefits costs could further pressure SG&A ratios.
⚠️ RED FLAG #4 - Warehouse Opening Slowdown: Costco revised FY26 warehouse openings to 28 from "30+" due to Spain delays. While seemingly minor, this continues a multi-year trend of opening fewer warehouses (28-30 annually) compared to historical peaks of 30-35. Slower unit growth = slower revenue growth long-term.
⚠️ RED FLAG #5 - Valuation Disconnect: The stock barely moved (-0.26%) despite beating EPS estimates and delivering solid results. This muted reaction at 52x forward P/E suggests the market is saying "great quarter, but already priced in." At $882/share, Costco trades at a premium valuation that leaves little room for error.