We're raising our Costco price target after a good but not great quarter. Here's why

CNBC Finance

8 min read

Costco Wholesale reported solid quarterly results on Thursday, slightly beating analyst forecasts on the key lines. While we would have preferred to see stabilized renewal rates in its key region, the retailer's consistently strong sales momentum can't be ignored. Total revenue in its fiscal 2026 second quarter increased 9.2% year over year to $69.6 billion, topping Wall Street expectations of $69.12 billion, according to estimates compiled by LSEG. Adjusted earnings per share (EPS) in the 12 weeks ended Feb. 15 rose 13.9% from the year-ago period to $4.58, beating the consensus of $4.56, LSEG data showed. With the results being mostly in-line, the stock wasn't doing much in after-hours trading. Still, the start of 2026 has much kinder to Costco shareholders compared to the last six months of 2025, when shares registered their first back-to-back quarterly declines since 2022. For the year, the stock is up roughly 14%. COST 1Y mountain Costco's stock performance over the past 12 months. Bottom line So, can the stock keep its run going and reclaim its high from the middle of last year? That's the question we find ourselves asking Thursday night. On one hand, it's hard not to be impressed with the 6% to 7% comparable sales growth the wholesale retailer has consistently put up month after month, and now quarter after quarter. The solid growth in both traffic and ticket sales tells us that the company is gaining market share in the highly competitive retail landscape. However, the thorn in our sides has been membership renewal rates, which for many quarters now have drifted lower. This slow drip hasn't been an indictment on the value of a Costco membership, but rather a dynamic related to an influx of online sign-ups who probably don't see the full appeal of a membership because they don't go to the stores. The proof is in the comp sales growth. Still, Costco makes most of its money on membership fees, so if lower renewal rates create a slowdown in membership growth, it matters to how we view the stock. Declining renewals are why we trimmed this position late last year, though not at the best price. When we reviewed Thursday's results, we were met with both joy and disappointment. The worldwide renewal rate finally stabilized, but the U.S. and Canada saw yet another downtick and it sounded like this problem will be with us for a few more quarters. Although management has yet to fully solve the online renewal piece, it's clear that the technology investments being made in stores are improving the customer experience for warehouse shoppers. That keeps us encouraged about the long-term opportunity once the online dynamic is fully played out. On the earnings call, CEO Ron Vachris highlighted improving checkout speed and employee productivity through enhancements in mobile wallets, pharmacy pay ahead, and pre-scan technology, which enables an employee to start ringing up small-to-medium carts while shoppers are still in line. These improvements have allowed Costco to handle new levels of growth while maintain the same staffing levels. Vachris, who's now been in the top job for two years , also said the company is piloting automated pay stations that allow customers to quickly pay for their pre-scanned orders, with an average transaction time of just eight seconds. Early results from the program are improving traffic flow inside the warehouses, which can make walking into a busy location feel far less daunting. He also said the company is working with the leading artificial intelligence companies to ensure Costco items appear on their tools. Finally, it's always good to remember that Costco tends to see a boost in traffic when prices increase at the pump. Members are more likely to drive to a Costco to fill up their tanks, and while they are in the area, they walk into the warehouses. "Generally speaking, if gas prices start to increase, then we tend to see our value proposition resonates better with member," CFO Gary Millerchip explained. Add it all up, the balance of the strong comp momentum and stabilization in worldwide renewals â with perhaps some "under promising, over delivering" at this point in U.S. and Canada renewals â should be enough to keep us involved in the stock here. But we recognize that some of the defensive-oriented stocks that thrived at the start of this year might be taking a breather here, so we're keeping our hold-equivalent 2 rating on shares. However, we're also nudging up our price target back to $1,100 from $1,050. Commentary Total fiscal second-quarter comparable sales, an important metric for the retail industry, increased 7.4% on a reported basis and 6.7% on an adjusted basis, which strips out the effects of foreign exchange and gasoline prices. The comps were driven by a 3.1% increase in traffic and an increase in ticket size of 4.2% on a reported basis and 3.5% on an adjusted basis. The traffic growth reflects an acceleration from the 2.6% pickup in the prior quarter â always positive to see. Costco's digitally-enabled comparable sales were up 22.6%. By category, fresh food comps increased low double digits in the quarter, while non-food comps sales increased high single digits. Some of the top performing departments were gold and jewelry, tires, major appliances, health and beauty, and small electronics. For its private-label Kirkland Signature brand , Costco launched 30 new items in the quarter, including crispy wings and blackened salmon. Costco also reduced prices on Kirkland Signature products like butter, facial tissue, organic seaweed, and organic coconut water. Costco also shared its sales results for the February period, which ended March 1. Total company comparable sales increased 7.9%, or 7.0% when excluding gasoline prices and foreign exchange. The results included a 0.5% positive impact on total company sales from the later timing of the Lunar and Chinese New Years. Comparable traffic in February was up 3% worldwide, roughly the same as the reported quarter. There was a minor impact on traffic in Costco's northeast U.S. locations due to the winter storms, but there was no major impact to sales. Back to the quarter, gross margins continued their upward trajectory, increasing 17 basis points year over year to 11.02%, or 11 basis points excluding the impact of gas prices. Operating margins improved from last year, too. If we look into the different components of the gross margin change, core merchandise margin declined 3 basis points year over year, and 7 basis points when excluding changes in gas prices. Costco's ancillary and other businesses â like pharmacy, food courts, and travel â added 19 basis points of improvement on a reported basis, and 17 basis points excluding gas. The company's "last in, first out" (LIFO) accounting had a four-basis-point negative impact, and there was a 5 basis point benefit from a non-recurring legal settlement. Costco's paid memberships increased in the quarter, but its growth was once again well below the FactSet consensus. Total paid memberships increased about 4.7% year over year â slower than last quarter's 5.2% growth â to 82.1 million, missing the estimate of 82.7 million. The company was able to stop the membership renewal rate bleeding, but not everywhere. The worldwide membership renewal rate stabilized at 89.7%, but U.S. and Canada dipped to 92.1% from 92.2% in the prior quarter. Once again, new online members were the driver of the downtick in renewal rates. These customers renew at a slightly lower rate than people who sign up at warehouses. As a result, when online members grow as a percentage of Costco's total base, the overall churn is slightly higher. Management continues to use targeted communication and retention strategies to offset the membership drops. Millerchip said renewal rates are seeing some benefit from their retention programs, but acknowledged there will be a few more quarters of downticks before reaching a maturation point. Finally, Costco opened three new warehouses. It plans to open 18 more over the course of the fiscal year, which has two quarters remaining. The planned total of 28 is unchanged from what management said last quarter. (Jim Cramer's Charitable Trust is long COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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We're raising our Costco price target after a good but not great quarter. Here's why

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