Opening bell guests (COST.US) exceed expectations in Q1 but market response is dull, concerns arise over slowing membership renewal rates and high valuation.

Costco (COST.US) announced that its performance in the first quarter of the 2026 fiscal year exceeded market expectations. The financial report shows that Costco's Q1 revenue was $67.31 billion, a year-on-year increase of 6.4%, surpassing the market's expectation of $67.14 billion. Among them, net sales were $65.98 billion, an 8.2% increase year-on-year; membership fees were $1.33 billion, a 14.0% increase year-on-year. Net profit was $2 billion, an 11.3% increase year-on-year; diluted earnings per share were $4.50, better than the market's expectation of $4.27. Q1 same-store sales increased by 6.4%, exceeding market expectations. Same-store sales in the United States increased by 5.9%. E-commerce sales also increased by 20.5%. This performance reflects Costco's continued strong sales growth, as the company attracts shoppers with ongoing promotional activities, larger packaging sizes, and the popular Kirkland brand. Despite facing inflation and job market challenges, many American consumers' spending habits remain stable this year. Their customer base tends to be more resilient to economic fluctuations as they are relatively affluent and need to pay membership fees to shop. Chief Financial Officer Gary Millerchip of Costco stated that the holiday season helped the company's salesits American food courts set a daily sales record on Halloween, selling 358,000 whole pizzas. In the three days leading up to Thanksgiving weekend, Costco sold 4.5 million pies. Costco's e-commerce business (focused on discretionary items) also performed well during the period when consumers stocked up on gifts and decorations. Black Friday was a record day for the American e-commerce business. Throughout the quarter, sales of gold, jewelry, electronics, and clothing all achieved double-digit year-on-year growth. Jefferies Financial Group Inc. analyst Corey Tarlowe said, "Looking ahead, we are encouraged by the broad sales momentum that Costco is experiencing and continue to believe that Costco offers tremendous value, which should drive healthy same-store sales growth in the future." Costco has been expanding its e-commerce business and trying to enhance the in-store experience, such as speeding up checkout and extending operating hours for some customers. The company has also mitigated the impact of tariffs by adjusting product transport routes, ordering more inventory in advance, and completely changing the product mix. Despite the better-than-expected performance, Costco's stock fell nearly 1% in after-hours trading on Thursday as of writing. The stock has accumulated about a 4% decline year-to-date. This is a surprising reversal for the company that has long outperformed the market. Over the past five years, the stock has risen by 135%, exceeding the S&P 500 index's 88% gain over the same period. Costco's flat performance this year suggests that Wall Street is starting to doubt the stock's ability to outperform the marketeven though its valuation remains high. The stock's current forward P/E ratio is around 43 times earnings, lower than the recent high of 57 times, but still significantly higher than the S&P 500 index's 22.5 times earnings. On the surface, Costco's performance seems to have no apparent issues. The retailer continues to achieve profit and revenue growth at a healthy pace, maintaining its reputation as one of the few companies in the consumer sector that consistently delivers solid performance. In fact, recent monthly sales reports from Costco show that overall same-store sales growth slightly exceeded 6% throughout the fall. This result indicates that demand remains healthy, and the company continues to gain market share. However, some analysts are concerned that Costco's membership renewal rate has started to slow down. In the fourth quarter of 2025, the renewal rate decreased slightly from 90.2% in the third quarter to 89.8%. UBS Group AG analyst Michael Lasser said this was the largest quarter-over-quarter decline in at least 15 years. The latest performance shows a renewal rate of 89.7% for the first quarter of 2026. Costco executives attribute the decline in the membership renewal rate to more people registering as members through online channels, pointing out that the average renewal rate for online members is slightly lower. Executives added that they expect the renewal rate to continue to decrease slightly until these trends stabilize and noted that the decline in this quarter was less than expected due to targeted marketing efforts aimed at expiring members. Lasser also added that investors are also concerned about how tariffs will affect Costco's operating costs and profit margins. Last month, Costco became one of the largest companies to sue the Trump administration over tariff issues. Large retailers had previously issued warnings about rising costs, but most did not file lawsuitsmaking the company a unique case. Costco's move is aimed at ensuring that if the Supreme Court rules the new import tariffs invalid, it can obtain tariff refunds. Encouragingly, Costco's Q1 gross margin was essentially flat with the same period last year, at 11.32%. Millerchip stated that a combination of various mitigating measures, such as increasing promotion of proprietary brands and increasing purchases from countries with lower tariff rates, is helping the company reduce the impact of tariffs on its customers.