We're raising our Costco price target after a good but not great quarter. Here's why

Costco Wholesale reported strong quarterly results on Thursday, slightly above top line analyst estimates. While we would prefer renewal rates in the key region to be stable, the retailer's consistently strong sales momentum cannot be ignored. Total revenue in the second quarter of fiscal 2026 rose 9.2% year over year to $69.6 billion, according to estimates compiled by LSEG, beating Wall Street expectations of $69.12 billion. Adjusted earnings per share (EPS) rose 13.9% year-over-year to $4.58 in the 12 weeks ending Feb. 15, beating expectations of $4.56, according to LSEG data. The stock wasn't performing much in after-hours trading as the results were mostly in line. Still, the start of 2026 is much more positive for Costco shareholders than the final six months of 2025, when shares posted consecutive quarterly declines for the first time since 2022. For the year, the stock is up about 14%. COST 1Year Costco's stock performance over the last 12 months. As a result, can the stock continue its rise and return to its mid-last year highs? That's the question we found ourselves asking Thursday night. On the one hand, it's hard not to be impressed by the 6% to 7% comparable sales growth that the wholesale retailer has consistently put out month after month and now quarter after quarter. Strong growth in both traffic and ticket sales shows the company is gaining market share in the highly competitive retail environment. However, the problem on our side was membership renewal rates, which decreased in many quarters. This slow decline is not an indictment on the value of Costco membership, but rather a dynamic related to the influx of online sign-ups who are likely not seeing the membership's full appeal because they don't go into stores. Proof of this is the growth in computer sales. Still, Costco makes most of its money from membership fees, so if low renewal rates cause a slowdown in membership growth, it matters how we view the stock. The reason we reduced this location late last year, although not at the best price, is due to a decrease in renewals. When we reviewed Thursday's results, we were met with both joy and disappointment. The worldwide replacement rate had finally stabilized, but the US and Canada saw another decline, and it looked like this problem would be with us for a few more quarters. While management hasn't yet fully resolved the online replenishment issue, it's clear that technology investments in stores are improving the customer experience for warehouse shoppers. This encourages us about the long-term opportunities once the online dynamic is fully rolled out. On the earnings call, CEO Ron Vachris emphasized increased checkout speed and employee productivity through improvements to mobile wallets, pharmacy prepayment and pre-scanning technology that allows an employee to start stealing small and medium-sized shopping carts while shoppers are still in line. These improvements allowed Costco to manage new levels of growth while maintaining the same staffing levels. Vachris, who has held the top spot for two years, said the company is also trialling self-checkout stations that allow customers to quickly pay for their pre-scanned orders, with an average processing time of just eight seconds. Early results of the program are improving traffic flow in warehouses, making walking into a busy location much less scary. He also said the company is working with leading AI companies to ensure Costco items appear on its vehicles. Finally, it's always good to remember that Costco tends to see an increase in traffic when prices increase at the pump. Members are more likely to go to Costco to fill their tanks and pop into warehouses when they're in the area. “Generally speaking, if gas prices start to rise, we tend to see our value proposition resonate better with members,” said CFO Gary Millerchip. Add it all up, and the balance of strong competitive momentum and stability in renewals around the world - perhaps with some "unpromising, over-delivery" in US and Canadian renewals at this point - should be enough to keep us involved in the stock here. However, we recognize that some of the defensively focused stocks that took off at the beginning of this year may take a breather here, which is why we maintain our 2 equivalent rating on the shares. However, we are also lowering our price target from $ 1,050 to $ 1,100. Comment Total fiscal second-quarter comparable sales, a key metric for the retail industry, rose 7.4% on a reported basis and 6.7% on an adjusted basis, excluding the effects of foreign exchange and gasoline prices. The comparisons resulted from a 3.1% increase in traffic and a 4.2% increase in ticket size on a reported basis and 3.5% on an adjusted basis. Traffic growth reflects an acceleration from the previous quarter's 2.6% increase; This is always a positive development. Costco's digitally enabled comparable sales increased 22.6%. By category, fresh food products increased in the low double digits for the quarter, while non-food product sales increased in the high single digits. Some of the best-performing segments were gold and jewellery, tyres, major appliances, health and beauty and small electronics. Costco launched 30 new products for its private-label Kirkland Signature brand this quarter, including crispy wings and blackened salmon. Costco also lowered prices on Kirkland Signature products like butter, facial wipes, organic seaweed and organic coconut water. Costco also shared sales results for the February period ending March 1. The company's total comparable sales increased 7.9%, or 7.0%, excluding gasoline prices and foreign currency. Results included a 0.5% positive impact on total company sales from the later timing of Lunar and Chinese New Years. Comparable traffic increased 3% worldwide in February; which was roughly the same as the reported quarter. There was a minor impact on traffic at Costco's northeastern U.S. locations due to winter storms, but no major impact on sales. Back in the quarter, gross margins continued their upward trend, increasing 17 basis points year over year to 11.02%, or 11 basis points excluding the impact of gas prices. Operating margins also improved compared to last year. If we look at the different components of gross margin change, core product margin fell 3 basis points compared to last year, and 7 basis points when excluding changes in gas prices. Costco's subsidiaries and other businesses such as pharmacy, food courts and travel added a 19 basis point improvement on a reported basis and a 17 basis point improvement excluding gas. The company's "last in, first out" (LIFO) accounting created a four basis point negative impact, with a 5 basis point benefit from the non-recurring legal settlement. Costco's paid memberships increased in the quarter, but its growth once again fell well below the FactSet consensus. Total paid memberships rose nearly 4.7% year-over-year (slower than last quarter's 5.2% growth) to 82.1 million, missing the forecast of 82.7 million. The company has managed to stem the bleeding in membership renewal rate, but not everywhere. The worldwide membership renewal rate stabilized at 89.7%, but the US and Canada fell to 92.1% from 92.2% in the previous quarter. Once again, new online members were influential in the decline in renewal rates. These customers renew at a slightly lower rate than people who sign up for warehouses. As a result, when online members increase as a percentage of Costco's total base, the overall churn is slightly higher. Management continues to use targeted communications and retention strategies to offset membership declines. Millerchip said renewal rates have seen some benefit from retention programs but acknowledged there will be a few more quarters of decline before they reach maturity. Finally, Costco opened three new warehouses. It plans to open 18 more during the fiscal year, which has two quarters remaining. The planned total of 28 is unchanged from what management said last quarter. (Jim Cramer's Charitable Trust has a long cost. See here for a complete list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation's portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.