Costco (COST) Q1 2026 earnings review
Digital Surge and Core Margin Expansion Drive Double-Digit Beat
Costco kicked off FY26 with robust momentum, delivering 8.2% revenue growth and an impressive 11.4% jump in EPS to $4.50. The headline story is the massive acceleration in e-commerce (+20.5%) and significant core margin expansion (+30 bps), proving operational efficiency is offsetting any inflationary pressures. While the membership renewal rate ticked down slightly (0.1%)—likely due to the digital mix shift—fee income surged 14%, bolstered by the recent fee hike. Adjusting for tax benefits, earnings power is even stronger than it looks (adjusted EPS +13.6%).
🐂 Bull Case
Digitally-enabled sales surged 20.5%, a significant acceleration from the ~13-15% range seen in late FY25. This suggests initiatives like the mobile app overhaul, improved search, and 'waiting rooms' for hot items are driving material conversion improvements.
Core-on-core gross margin expanded by 30 basis points. In a low-margin business like warehouse retail, this is a massive efficiency gain, driven by supply chain improvements and the high-margin digital mix.
🐻 Bear Case
For the second consecutive quarter, renewal rates ticked down by 0.1% (US/Canada to 92.2%, Worldwide to 89.7%). While management blames the mix of 'digital-first' younger members, a consistent downward drift in Costco's most critical KPI is a watch item.
US comparable sales (+5.9%) lagged significantly behind Other International (+8.8%). As the US market matures, reliance on international expansion and e-commerce becomes critical to sustain high-single-digit top-line growth.
⚖️ Verdict: 🟢🟢
Excellent. Costco is firing on all cylinders: traffic is up, baskets are up, e-commerce is booming, and margins are expanding. The ability to grow EPS 13.6% (adjusted) while lowering prices on staples like bacon and facial tissue demonstrates a widening competitive moat.
Key Themes
E-Commerce Re-Acceleration
Digital sales are no longer just a 'nice to have'—they are a primary growth engine. Comps hit +20.5% (adjusted), accelerating sharply from +13.6% in 25Q4. Drivers include app improvements (passwordless sign-in, personalized recommendations) and stronger logistics execution. This segment is growing 3x faster than the core warehouse business.
Core Margin Expansion
Reported gross margin increased 4 bps, but the 'Core-on-Core' margin (excluding gas and LIFO noise) jumped 30 bps. This indicates Costco is extracting significantly more profit from merchandise sales through buying power and supply chain efficiencies, even while explicitly lowering prices on staples like KS Bacon (-$2.00) and KS Walnuts (-$1.50).
Membership Fee Super-Cycle
Membership fee revenue grew 14.0% YoY to $1.33 billion. This reflects the compounding effect of the September 2024 fee increase ($5/$10 hike) combined with 5.2% subscriber growth. This high-margin income stream provides substantial dry powder for price investments to widen the price gap against competitors.
Renewal Rate Drift
Renewal rates are slowly leaking lower. US/Canada dropped to 92.2% (from 92.3% in 25Q4 and 92.7% in 25Q3). Worldwide dropped to 89.7% (from 89.8% in 25Q4). While still industry-leading, the trend is negative. Management previously attributed this to a 'digital mix shift' (younger online sign-ups renew less), but the persistence of the decline warrants scrutiny.
Deflationary Pricing Power
Costco is aggressively cutting prices. The presentation highlights specific 'New Member Values'—KS Chicken Pot Pie down $0.30/lb, KS Bacon down $2.00, KS Walnuts down $1.50. This confirms Costco is passing supply chain savings to members to drive traffic (+3.1% comparable traffic) rather than banking the savings.
Stock-Based Comp Tax Benefit Noise
Headline EPS benefited from a $72M tax benefit related to stock-based compensation ($0.16/share). However, this is *lower* than the $100M benefit ($0.22/share) in the prior year period. While this creates noise, it actually masks the strength of the underlying business—operational net income grew faster than reported net income.
Other KPIs
Stable. Up $2.0B from the end of FY25 (August), driven by strong operating cash flow of $4.7B in the quarter. The balance sheet remains a fortress.
Net growth of 9 locations in the quarter (opened 7 in Q1, closed/relocated others). Expansion targets 21 more openings in the remainder of FY26, bringing total year-end count to ~942.
Up roughly 16% YoY (from ~$18.1B in comparable period last year). This outpaces sales growth of 8.2%, likely reflecting early holiday stocking or the integration of new product categories. Needs monitoring for clearance risk.
Guidance
Stable. Costco opened 7 net new in Q1 and plans 21 more for the rest of the year. This represents ~3% unit growth, consistent with historical pacing.
The variability in stock-based compensation tax benefits ($72M this quarter vs $100M last year) makes effective tax rate modeling difficult. Investors should focus on pre-tax operating income to strip out this volatility.
Key Questions
Renewal Rate Structural Decline
Renewal rates have ticked down 0.1% sequentially for two consecutive quarters. Is this purely the denominator effect of digital sign-ups, or are you seeing any resistance to the fee increase among legacy members?
Sustainability of Margin Expansion
Core-on-core margins expanded 30bps this quarter. Given your philosophy to reinvest savings into price, should we view this margin expansion as a timing mismatch before prices are lowered further, or a structural shift due to the higher-margin ad/digital business?
Inventory vs Sales Divergence
Merchandise inventories appear to be up significantly faster than sales growth (+16% inventory vs +8% sales). Is this a strategic pull-forward due to tariff concerns, or are we seeing slower sell-through in certain discretionary categories?
E-Commerce Acceleration Drivers
E-commerce growth re-accelerated to 20%+. How much of this is driven by the mobile app improvements versus the expanded appliance/bulky delivery logistics? What is the margin profile of this incremental 20% growth compared to in-store sales?