Costco's quarter isn't enough to knock out the bears — here's what could

Costco reported better-than-expected quarterly results on Thursday, driven by higher net sales, membership fee revenue and gross margins. But that wasn't enough to break the bearish narrative on the stock, which fell less than 1% in the post-close market. The company's total revenue in the first quarter of fiscal 2026 rose 8% year over year to $67.31 billion, beating Wall Street expectations of $67.14 billion, according to estimates compiled by LSEG. Adjusted earnings per share (EPS) for the period ending Nov. 23 rose 11% year-over-year to $4.50, beating expectations of $4.27, according to LSEG data. COST YTD mountain Costco YTD return Bottom Line The Quarter looked well down the fairway, with strikeouts on key line items. If there is one point to choose, it is the membership renewal rate, which has fallen for several consecutive quarters and is expected to continue falling in the coming months. We don't see the decline in renewal rates as a warning sign that Costco membership is losing its appeal. The values have not changed: Deliver the most value to customers by offering quality products at the lowest prices. In this way, the retailer delivers strong comparable sales consistent with growth and market share gains in both traffic and ticketing. At the same time, we must admit that there has been a slight slowdown in stores recently. Costco's November U.S. sales rose 5.8%, excluding gas and currency fluctuations; This reflects a significant slowdown from October's 6.4% growth. Why we have it Costco is the world's best-run retailer, with a business model focused on offering members a relatively small selection of products at unbeatable prices. Costco has been successful for decades, but high inflation in recent years has really burnished the company's value-focused ethos. Competitors: BJ's Wholesale Corp., Walmart, owner of Amazon Clubmate Last purchase: June 15, 2020 Start date: January 27, 2020 During the conference call, management was adamant that the business had not lost its consistency and cautioned against reading too much into a single month's results. “If you look at each month, there have only been two months in the last seven months that were outside the 6% to 7% range,” CFO Gary Millerchip explained, adding that the company has seen a “consistent pattern” in the way members shop and behave. Consistent mid-single digit growth is the envy of nearly every retailer. A slight slowdown is viewed differently in the context of Costco's shares, though; these shares are trading at a high price-to-earnings multiple of approximately 43. Even after Walmart's outperformance this year, it's still trading at a P/E ratio of around 40. Both stocks are trading at a hefty premium to the S&P 500's forward multiple of 23-24. It is possible that the government shutdown will affect October and November and sales will rebound in the coming months. However, the company is trying to refute the narrative that there has been a drastic slowdown in sales and the lack of paid memberships does not help the argument. We're leaving the quarter with not enough money to lift the stock amid its recent decline, but enough to believe a turnaround is likely. What might help improve the narrative is the solid-looking December sales release on January 7th. Until then, we maintain our 1 rating on Costco due to our positive long-term view, but lower our price target from $1,100 to $1,050 to reflect recent share price weakness. Comment Total fiscal first-quarter comparable sales, a key metric for the retail industry, rose 6.4% on a company basis and on an adjusted basis that excludes the effects of foreign exchange and gasoline prices. The comparisons were driven by a 3.2% increase in traffic and a 3.1% increase in ticket sales. Traffic growth reflects a slowdown from the previous quarter but remains healthy. Costco's digitally enabled comparable sales increased 20.5%. By category, fresh food ingredients increased in the mid-to-high single digits on a percentage basis for the quarter, while non-food products increased in the mid-single digits. Some products with double-digit merchandising growth included gold and jewelry, special events and health and beauty. Major appliances, tires and small appliances recorded high single-digit growth. At Costco's private label brand, Kirkland Signature, the company launched 45 net products in the quarter. As previously noted, gross margins increased four basis points to 11.32%, narrowly beating the consensus estimate of 11.31%. Gross margins also increased by four basis points, excluding gas deflation. If we look at the different components of gross margin change, core product margin was flat year over year, Costco's subsidiaries and other businesses (including pharmacy, food courts, and travel) added seven basis points of improvement, and "last in, first out" (LIFO) accounting had a three basis point negative impact. Costco's paid memberships increased in the quarter, but not as much as the market expected. Total paid memberships rose 5.2% year over year to 81.4 million, but missed the FactSet consensus of 82.4 million. A decline in membership renewal rates may have contributed to this miss. Worldwide membership rate fell to 89.7% from 89.8% in the previous quarter, while in the US and Canada it fell to 92.2% from 92.3% in the previous quarter. These declines help explain some slowing paid membership trends. The same dynamics that harmed renewal rates in previous quarters continued in November. Costco has seen its renewal rates drop due to increased online memberships. The company's online shoppers are younger and more fickle, resulting in lower renewal rates than in-store customers. The good news is that management said the renewal decline was lower than expected because targeted communications to expiring members were starting to have an impact. Still, this problem isn't going away anytime soon. The company expects a slight decline in overall rates over the next few quarters. Expansion plans Costco opened seven new warehouses. It plans to open 21 more warehouses during the financial year, taking the total to 28. This would be an increase from last year, but below the 30 new warehouse openings that management had originally planned to open. The company wrote revisions to delays at several buildings in Spain. Costco is still planning 30 or more net openings in coming years and is expanding its real estate team to support that goal. (Jim Cramer's Charitable Trust is long COSTCO. See here for a full list of stocks.) 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