costco (NASDAQ: COST)the world’s largest retail warehouse club, is often considered a permanent investment. However, in the last 12 months, its shares fell 3% while the S&P 500 rose 16%. Let’s look at why it underperformed the market and if it can recover over the next year.
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Costco can afford to sell its products at low margins because it generates most of its profits from higher-margin membership fees. Its scale allows it to negotiate lower wholesale prices with its suppliers and it is also selling more higher-margin Kirkland private label products.
As long as Costco increases comparable-store sales, opens more warehouses, adds new cardholders and maintains high renewal rates, its core business will remain healthy. But over the past year, its overall renewal rates fell, even as its other growth metrics improved.
|
Metric |
First quarter of 2025 |
Second quarter of 2025 |
Third quarter of 2025 |
Fourth quarter of 2025 |
First quarter of 2026 |
|---|---|---|---|---|---|
|
Comparable sales growth* (yoy) |
7.1% |
9.1% |
8% |
5.7% |
6.4% |
|
Total warehouses |
897 |
897 |
905 |
914 |
923 |
|
Total cardholders (millions) |
138.8 |
140.6 |
142.8 |
145.2 |
145.9 |
|
Global renewal rate |
90.4% |
90.5% |
90.2% |
89.8% |
89.7% |
Data source: Costco. *Excluding fuel and currency sales. (Fiscal year ends in August).
Costco attributed that decline to lower renewal rates among its “digitally signed” members, who signed up online instead of in a warehouse. These buyers are generally younger and more likely to cancel their memberships if they don’t get enough value from them.
Costco management believes its digitally signed members have lower brand commitment than its physically signed members because they do not fully appreciate its ancillary services, special events, and other benefits. To address those challenges, Costco plans to ramp up targeted digital communications (emails and app notifications), promote auto-renewal features, and launch additional benefits to demonstrate the value of its memberships.
From fiscal 2025 to fiscal 2028, analysts expect Costco’s net sales and EPS to grow at a CAGR of 8% and 11%, respectively. Even if your renewal rates drop slightly, you can likely offset that pressure by opening more warehouses, gaining more members, and increasing your rates.