Costco’s Growth Story Meets a Small Hiccup
For years, Costco Wholesale (NASDAQ: COST) has been one of Wall Street’s most reliable retail growth stories, built on a simple but powerful model: sell memberships, keep renewal rates high, and generate consistent revenue from fees that fuel aggressive pricing and member loyalty. But in its most recent quarter, the warehouse giant reported something investors aren’t used to seeing — a slight dip in renewal rates.
At first glance, that headline might rattle investors. After all, Costco’s membership renewals are at the core of its business, with much of its profitability tied directly to recurring fee income. However, looking beneath the surface reveals a more nuanced story. Membership dollars are still growing, paid memberships are rising, and executive-tier upgrades are accelerating. The question isn’t whether Costco’s business is weakening — it’s whether its stock price is leaving room for error.
Renewal Rates Show a Slight Slip, But Context Is Key
At the end of the quarter, U.S. and Canada renewal rates stood at 92.3%, while the worldwide rate came in at 89.8%. Both metrics were about 40 basis points lower than the prior quarter, and slightly below 2024 levels.
On the surface, this looks like a small but meaningful decline. However, Costco’s CFO, Gary Millerchip, explained that the dip was largely due to a shift in member mix, not weakening loyalty. Specifically, a larger number of online sign-ups — including a major Groupon campaign in late 2023 — entered the renewal pool. Online cohorts historically renew at slightly lower rates in their first cycle compared to in-warehouse sign-ups.
This nuance matters. The headline percentage slipped, but the membership fee engine kept humming:
- Membership fee income rose 14% year over year, reaching $1.72 billion.
- Paid memberships grew 6%, hitting about 81 million.
- Executive memberships neared 39 million, accounting for over 74% of total sales.
- Upgrades and perks — such as extended store hours and Instacart credits — drove higher engagement and lifted U.S. weekly sales by roughly 1%.
Simply put, while renewal rates softened, Costco’s membership economics remain robust. Growth in paid memberships, particularly higher-value executive tiers, shows the long-term model is intact.
Costco’s Membership Engine Fuels the Bigger Picture
One of Costco’s greatest strengths is that membership income is largely insulated from short-term retail fluctuations. Even if discretionary spending slows in certain categories, recurring fees provide steady cash flow that supports its aggressive pricing strategy and fuels continued expansion.
In fact, Costco has consistently used this model to outpace peers in both growth and customer loyalty. Comparable sales in the most recent quarter rose mid-single digits (6.4% excluding fuel and currency), e-commerce sales jumped 14%, and the company continues to expand its global footprint with new warehouse openings.
This balance of growth across in-store, digital, and membership upgrades shows why Costco remains a best-in-class retailer.
Valuation — The Real Investor Concern
While membership renewal headlines drew attention, the more pressing issue for investors may be valuation. At around 50x trailing earnings, Costco trades at a steep premium compared to other big-box retailers like Walmart or Target, which typically trade at far lower multiples.
This premium assumes Costco will continue delivering flawless execution — rising membership fees, stable renewals, strong comparable sales, and ongoing global expansion. Any hiccup, whether in renewal stabilization, digital member stickiness, or macroeconomic headwinds, could cause outsized volatility in the stock.
For long-term investors, the underlying story is as strong as ever. But for new buyers, the stock’s elevated valuation leaves little margin of safety.
The Bottom Line: Loyalty Strong, Patience Wiser
Costco’s slight dip in renewal rates is less a red flag and more a reminder that no growth story is perfectly linear. Membership income is rising, paid and executive memberships are growing, and customer loyalty remains among the strongest in retail. The real challenge isn’t whether Costco can maintain its model — it’s whether the stock price fairly reflects future growth.
For investors, that means Costco remains a long-term winner worth holding, but new buyers may want to wait for a pullback before jumping in. Loyalty is intact, value creation is ongoing, but at nearly 50 times earnings, patience might prove just as rewarding as membership itself.