US Gov. Shutdown Casualty? COST's Last Dip?

Global discount retail leader — $Costco Wholesale(COST.US) reported Q1 FY2026 (through Nov 23) after hours on Dec 11. Headline results were steady, with revenue and OP growth showing some improvement and modestly beating estimates. However, on core operating metrics, comps/traffic and member adds/renewal rates were still soft.

In detail. See below.

1) Comps look better, but traffic is still weakening: Costco’s comps rose 6.4% this quarter, a 70bps acceleration vs. last quarter. Beneath that, comp traffic decelerated to 3.1% from 3.7%, a bigger slowdown than the Street expected.

2) Deferred price hikes are showing up: The lift in reported comps was driven entirely by higher ticket. Avg. ticket rose 3.2% YoY vs. 1.9% last quarter, helped by fading headwinds from fuel prices and FX.

Even ex-fuel and FX, avg. ticket was up 3.2% YoY vs. 2.6% in the prior quarter. This suggests that despite efforts to restrain or delay price increases, inflation and tariffs are ultimately flowing through to shelf prices.

3) North America, the largest region, was the softest: By region and ex-FX and fuel, the U.S. comp growth edged down to 5.9% vs. 6.0% last quarter. Elsewhere ex-U.S., trends were also stable-to-softer, with Canada the standout.

The driver is the same: U.S. comp traffic slowed to 2.6% from 3.5%, the second straight notable deceleration. That raises concerns that U.S. member spending power is weakening, and with 70%+ of revenue from the U.S., it weighs on the group.

4) Online was very strong: Against softer store traffic, e-commerce revenue rose 21% YoY, well above last quarter and ahead of Bloomberg consensus at 18%. The company also broadened its reporting scope to include orders via third-party platforms such as DoorDash and Instacart.

Management again underscored the importance of digital channels, continuing to invest in personalization and search. With store traffic growth cooling while online accelerates, the trend points to a renewed shift in U.S. consumer preference toward online.

4) Store openings remain brisk: Costco added a net 9 clubs, taking the fleet to 923, and reiterated plans to keep an elevated pace of ~30 net openings per year. With better reported comps and new club contribution, merchandise sales grew 8.2% YoY, a slight acceleration and a touch above expectations.

5) Membership is bifurcating: Membership fee income was about $1.32bn, rising 14% YoY. The main driver was higher avg. fee per member, up 8.4% YoY, reflecting prior price increases.

On volume, paid members rose by only 0.4mn QoQ, the smallest quarterly net add since 2019. Renewal rates fell another 10bps QoQ in both North America and globally, now down a cumulative 80bps from the peak.

That said, Executive members increased by 1.0mn net this quarter. This indicates a two-speed mix, with more loyal high-tier members rising while marginal entry-level members churn.

As management explained, post-Covid, Costco acquired many younger users via online and discount channels who tried the service but did not convert to core loyalists. This structurally pressured renewals.

6) GPM and expense ratio volatility narrowed: After sharp swings last quarter and a dip in retail margin, both lines stabilized and margins returned to an improving trend.

Retail GPM was 11.32%, up 4bps YoY. Core merchandise margins were roughly flat YoY; non-merch businesses (travel, insurance, consumer finance, etc.) added 7bps, partly offset by higher costs under LIFO.

The expense ratio rose just 1bp YoY. Store opex was up only 1bp YoY, while HQ, SBC and tax adjustments broadly offset each other, easing fears of sustained expense deleverage.

Management noted ongoing headwinds from labor inflation and longer operating hours, plus higher medical costs that were not initially anticipated. Efficiency gains largely offset these pressures, and absent medical cost headwinds, the opex ratio would have tightened YoY.

7) Profit back to double-digit growth: With GPM improving slightly more than opex, OP margin expanded 13bps YoY. OP was $2.46bn, up 12.2% YoY, a clear improvement from last quarter’s single-digit growth.

Net income was about $2.0bn, up 11.3% YoY, held back by a 25.5% tax rate (+50bps YoY) and smaller tax benefits (~$72mn vs. ~$100mn last year). Ex the tax benefit delta, NI growth was approx. 13.6%.

Dolphin Research view:

Overall, one of Costco’s hallmarks — stability — still shows through. Revenue growth stayed high-single-digit and profit growth returned to 10%+, both improving vs. last quarter and slightly better than expected.

But stripping out fuel and FX, comps are still easing at the margin. The mix is telling: traffic growth slowed more visibly, while higher ticket in an inflationary backdrop (and mix) prevented a larger comps slowdown, implying softer spending power, especially in the U.S.

Mirroring weaker traffic, member adds slowed and renewal rates fell — both signs of a softer customer cohort. A temporary lapse in fiscal support from a U.S. Gov. funding gap likely also weighed on middle-income spending, which Costco proxies.

Together these signals do not predict whether trends will worsen or improve from here. They do suggest the segment is in a relatively weak cycle that may persist near term.

In other words, near to mid term, growth should remain steady rather than strong. On the plus side, Costco appears able to absorb cost inflation via efficiency while passing some cost through, capping opex deleverage to just 1bp — a pleasant surprise for Dolphin Research.

Still, one quarter does not clear the cost overhang. We need another quarter or two of confirmation.

Given capital flows favor chips and hardware, with broad layoffs in labor-intensive areas, consumption and tech may be on opposite sides of the seesaw. We thus stay relatively cautious on Costco in the near to mid term.

While the multiple has corrected from 50x–60x PE to ~45x, the absolute valuation remains rich, leaving room for further multiple compression even if fundamentals hold up.

Longer term, Costco’s quality and resilience are intact. Management plans ~30 net new clubs per year, signaling counter-cyclical expansion to lever the upturn when it comes. Sub-40x could be attractive, or if we see signs of the U.S. growth engine rotating from tech capex back toward consumption, Costco remains a solid choice for stability-seeking investors.

Detailed review below:

I. U.S. trends remain soft; comps not truly improving

1) Apparent comp recovery, but traffic still slowing

Core operating metrics: comps rose 6.4%, up 70bps QoQ and above consensus. But comp traffic slowed to 3.1% from 3.7%, exceeding the expected decline.

Thus, the comp lift was driven by avg. ticket up 3.2% YoY vs. 1.9% last quarter, aided by the full fading of fuel and FX headwinds this quarter.

Ex-fuel and FX, avg. ticket growth accelerated to 3.2% from 2.6%. With tariffs and labor inflation lifting procurement and operating costs, Costco deferred price hikes where possible, but pass-through to shelf prices has become unavoidable.

2) U.S., the largest market, saw further traffic slowdown

By region and ex-FX/fuel, U.S. comp growth ticked down to 5.9% vs. 6.0% last quarter (reported comps accelerated). Other Intl. markets were also stable-to-softer, while Canada remained strong with two consecutive quarters of comp acceleration.

The core reason: U.S. comp traffic fell to 2.6% from 3.5%, the second straight meaningful slowdown. That calls into question U.S. member spending power, while Canada’s resilience reflects a steady 5% comp traffic growth.

With 70%+ of revenue from the U.S., Canada’s strength cannot offset U.S. softness at the group level.

3) E-commerce growth remained high; U.S. online penetration rising

E-comm rose 21% YoY, far faster than last quarter and above the 18% consensus. Part of the boost likely comes from the broader definition that now includes third-party platforms such as DoorDash and Instacart.

Even so, with store traffic soft and online strengthening, the trend persists. Product and UX upgrades, including better personalization and search, help, and the shift hints at a faster rotation of U.S. consumption toward online.

4) Similar to last quarter, ex-FX/fuel comps were broadly flat, and traffic slowed further. But reported comps — which reflect price/fuel/FX — rebounded.

Net clubs rose by 9 this quarter, matching last quarter and equal to roughly 1% growth. With reported comp improvement and new space, merchandise sales grew 8.2% YoY, a slight acceleration and a mild beat.

II. Membership bifurcation and premiumization

Membership fees, smaller in revenue but with outsized profit contribution, were about $1.32bn, up 14% YoY as the post-hike tailwind continues.

Avg. fee per member was $65 (annualized), up 8.4% YoY, showing price drove growth more than volume.

On volume, paid members rose by just 0.4mn QoQ, the lightest quarterly net add since 2019. Renewal rates fell another 10bps QoQ in North America and globally, now down 80bps cumulatively from the peak after three consecutive declines.

Notably, while total members were up 0.4mn, Executive members increased by 1.0mn. This underscores a bifurcation and mix upgrade: more loyal high-tier members, fewer marginal basic members.

As previously discussed by the company, lower renewals (and the implied net loss of basic members) stem from a wave of post-Covid users acquired through online/discount channels who tried but did not convert into loyalists within the membership period. Churn was thus unsurprising.

Recent fee hikes, stricter membership checks, and softer traffic under inflation may also have weighed on renewals.

III. Expense expansion reversed; profit back to double digits

1) Combining retail and membership, total revenue was $67.3bn. With reported merchandise growth faster and membership still strong, total revenue growth accelerated to 8.3%, slightly ahead of consensus.

2) On GP and opex, after outsized swings last quarter, both ratios were broadly stable YoY this quarter. Retail GPM was 11.32%, up 4bps YoY; non-merch businesses added 7bps, partly offset by +3bps cost under LIFO.

Including membership fees, overall GPM rose 13bps YoY, with gross profit at $8.8bn, up 8.6% YoY.

3) Similarly, versus last quarter’s notable opex expansion, the expense ratio rose just 1bp YoY. That eased concerns about sustained deleverage in this macro environment, with store opex up 1bp YoY and HQ/SBC/tax effects broadly offsetting.

It suggests last quarter’s union-related labor cost spike was more of a one-off, which somewhat contradicts the prior signal — worth monitoring for any update from management.

4) With small moves in both GPM and opex, and a slightly larger lift in GPM, OP margin expanded 13bps YoY. OP reached $2.46bn, up 12.2% YoY, ending last quarter’s single-digit growth.

Importantly, this alleviates fears that inflation would drive a trend of expense ratio increases and cap margin expansion. But one quarter is not conclusive; further monitoring is needed.

Net income grew 11.3% YoY to about $2.0bn on a 25.5% tax rate (+50bps YoY) and smaller tax benefits (~$72mn vs. ~$100mn). Ex that, NI growth would be approx. 13.6%.