Costco Q3 Slightly Beats Expectations, Gasoline Boosts Short-Term Growth While Long-Term Value Remains

Overview

This report analyzes Costco Wholesale Corp's (COST.US) FY26 Q3 earnings. Despite minor gross margin compression from gasoline inflation, overall performance remained strong with revenue and profits slightly exceeding expectations. Analyst Jeremy Miles views rising gasoline prices as a short-term traffic catalyst while the core membership model and long-term global expansion thesis remain intact. Bernstein maintains an 'Outperform' rating and adjusts the target price from $1,192 to $1,194, emphasizing its value as a high-quality defensive asset for long-term allocation.

Core views

Costco demonstrated remarkable resilience in FY26 Q3. Excluding fuel and FX impacts, comparable sales still grew 6.6%, with traffic up 2.4% and average ticket up 4.2%. Regionally, the US led with 6.8% comp growth while Canada and other international markets maintained healthy 5.9%-6.2% growth. Digital channels emerged as a new highlight, with e-commerce sales surging 20.8% driven by pharmacy, jewelry, toys, and home goods. However, gasoline inflation pushed costs higher, reducing gross margin by 20bps YoY to 11.04% (core merchandise margin down 9bps), while EBIT margin remained flat at 4.1%. Membership metrics showed paid members reaching 82.9 million (+4.0% YoY), slowing from 4.7% last quarter but still healthy given US market saturation. Crucially, loyalty indicators improved: US/Canada renewal rates rose 10bps to 92.2%, with global rate stable at 89.7%. Membership fee income grew 10.7% to $1.37 billion, slightly above expectations. The report notes that even if membership fee growth fluctuates short-term due to base effects or pricing cycles ending, newer businesses like retail media could provide offsets. For outlook and valuation, management reduced FY26 new warehouse openings from 28 to 26 (cutting 1 each in US and international), but this doesn't alter the multi-decade global expansion opportunity. Near-term catalysts include gasoline-driven traffic benefits and the upcoming anniversary of 2023 Groupon promotions' low renewal rate base effects, plus potential special dividend surprises from strong cash flows. Long-term DCF models still suggest over 20% upside, supporting the current premium valuation.

Analysis framework

The institution employed a comprehensive framework combining 'volume-price decomposition + membership quality verification + long-term DCF'. First, removing fuel and FX noise to reveal true retail organic growth avoids misjudgment from commodity volatility. Second, combining membership fee growth with renewal rates distinguishes 'price-driven' from 'true user stickiness' - a core method for evaluating warehouse clubs' moats. Finally, valuation doesn't rely solely on trailing P/E but validates premium multiples through long-term DCF while monitoring warehouse opening cadence's marginal impact on future FCF. This approach helps investors see through short-term macro noise to discern fundamental business model changes.

Methodology notes

• Industry Analysis FrameworkVolume-price decomposition

  Comparable sales analysis excluding fuel and FX impacts

  For retailers with gas stations, total comps can be distorted by oil price swings. Stripping out fuel and FX factors precisely identifies 'true' retail growth driven by traffic and ticket size - standard practice for assessing core competitiveness.

• Competitive & Strategic FrameworkMoat / competitive advantage

  Cross-validation of renewal rates and membership fee income

  Membership fee growth alone may reflect price hikes, while renewal rates are the true 'litmus test' for loyalty and brand stickiness. Combining both confirms that despite slowing member growth, retention quality is improving, proving moat expansion.

• Valuation MethodologyDCF Discounted Cash Flow

  Long-term DCF validating premium valuation

  For high-PE quality growth consumer stocks, static multiples often fail. Using long-term DCF to anchor intrinsic value emphasizes that even at current premiums, substantial upside remains if global expansion delivers sufficiently certain FCF.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Costco Wholesale Corp (COST.US)

  Core coverage, benefiting from membership model certainty and short-term gasoline-driven traffic

  Strengths

  Exceptionally high renewal rates (92.2%), strong pricing power, vast global warehouse expansion potential, robust cash flows

  Weaknesses

  Natural member growth slowdown in saturating US market, short-term fuel inflation margin pressure, FY26 opening guidance reduction

  Comparison

  Viewed as highest-quality retail company in coverage vs. pure e-commerce or traditional supermarkets, with stronger cycle resistance and user stickiness

  Risks

  Unexpected consumer environment deterioration, new store expansion shortfalls, membership renewal or upgrade rate declines

Key data

• Q3 Comparable Sales Growth+9.8%Exceeded consensus 7.8%, including fuel impact
• Q3 Ex-Fuel/FX Comparable Sales+6.6%Reflecting true retail organic growth, slightly below 6.7% expectation
• Q3 EPS$4.932 cents above consensus
• Membership Fee Income Growth+10.7%Paid members up 4.0% to 82.9 million
• US/Canada Renewal Rate92.2%Up 10bps QoQ, recent high
• FY26 New Warehouse Guidance26Down 2 from prior outlook, Q4 plans for 12 openings
• FY26E EPS Forecast$20.64Down from $21.25, mainly fuel and FX assumption changes

Impact & implications

The report concludes that Costco's current share price already reflects some quality premium, but fundamental support remains solid. Short-term, while gasoline prices pressure margins, they unexpectedly serve as a 'traffic driver' sustaining visits amid uncertain consumption. Long-term, as 2023 promotion base effects fade and international penetration continues, membership fee growth should normalize around ~7%. Investors shouldn't be swayed by single-quarter opening adjustments or cyclical margin fluctuations, but focus more on renewal rates as leading indicators and long-term global warehouse expansion. Additionally, ample cash reserves make special dividends a potential extra return source.

Risks

• Unanticipated weakness in US or key international economies, reducing comp sales and causing expense deleverage
• Failure to meet US and international new store targets, impacting member acquisition and sales growth
• Inability to maintain historical membership renewal or upgrade rates, reducing overall profitability

What to watch

• Short-term membership fee income (MFI) growth changes and potential offsets from retail media etc.
• Progress in fully absorbing 2023 Groupon promotion impacts on renewal rates
• Whether FY26 Q4 actual openings match adjusted 12-unit guidance
• Persistent effects of gasoline price volatility on subsequent quarter margins and traffic