Headline earnings per share often steals the spotlight, but seasoned investors know that every company has a handful of business-specific metrics that tell the real story. For Costco, understanding membership trends, comparable store sales, and inventory management reveals far more about the company's health than a single EPS number. Knowing what to expect from Costco earnings means focusing on the operational drivers that actually move the business forward quarter after quarter.
Key takeaways
- Membership renewal rates above 90% signal customer loyalty and recurring revenue strength, while declining rates suggest competitive pressure
- Comparable store sales growth between 5-8% typically indicates healthy traffic and spending patterns without relying on new store openings
- Inventory turnover ratios faster than competitors reflect Costco's efficient model of moving high volumes at thin margins
- E-commerce penetration growth shows whether the company is adapting to changing shopping behaviors while protecting its warehouse advantage
- Gross margin stability matters more than expansion because Costco's model depends on volume, not markup
Why membership metrics tell the real story
Costco operates on a fundamentally different model than most retailers. The company makes the bulk of its operating income from membership fees, not from marking up merchandise. This means the strength and growth of the membership base functions as the foundation for everything else.
When analyzing a COST earnings preview, start with two membership numbers: renewal rates and total paid members. Renewal rates consistently above 90% in North America demonstrate that customers see enough value to keep paying the annual fee. A decline of even two or three percentage points can signal pricing pressure, increased competition, or diminishing perceived value.
Membership renewal rate: The percentage of members who choose to renew their Costco membership when it expires. This metric matters because it measures customer satisfaction and predicts future recurring revenue with high accuracy.
Total paid membership growth shows whether the company is expanding its customer base or plateauing. Look for steady growth in both Gold Star and Executive memberships, with particular attention to Executive tier penetration. Executive members pay double the fee and typically spend more per visit, making them especially valuable to the business model.
What comparable store sales reveal about underlying demand
Comparable store sales strip away the impact of new warehouse openings and focus purely on performance at existing locations. This metric isolates whether growth comes from genuine demand increases or simply from adding more square footage.
For Costco earnings analysis, comparable store sales in the 5-8% range historically indicate healthy performance. Results below 3% may suggest weakening traffic or reduced spending per visit. Results above 10% could indicate strong momentum, but verify whether it comes from inflation, increased traffic, or higher basket sizes. Each driver has different implications for sustainability.
Pay attention to the breakdown between traffic and ticket size. Traffic growth means more people are walking through the doors, which typically leads to membership renewal and expansion opportunities. Ticket growth without traffic might reflect inflation or mix shift toward higher-priced items, which can be less sustainable if customers start trading down or shopping less frequently.
How inventory efficiency separates Costco from competitors
Costco's entire strategy depends on turning inventory quickly while operating on razor-thin margins. The company buys in massive volume, negotiates aggressive pricing, and moves products before paying suppliers. This creates a cash conversion cycle advantage that funds growth without heavy borrowing.
Inventory turnover ratio measures how many times per year the company sells through its entire inventory. Faster turnover means less capital tied up in merchandise and fresher products on shelves. When evaluating what to expect from Costco earnings, compare inventory growth rates to sales growth rates. Inventory growing faster than sales suggests overstocking, potential markdowns, or slowing demand.
Inventory turnover ratio: Calculated as cost of goods sold divided by average inventory. Higher ratios indicate the company sells through inventory quickly, requiring less working capital and reducing obsolescence risk.
Also watch inventory per warehouse. If this metric climbs significantly, it might mean the company is struggling to move products or preparing for anticipated demand that hasn't materialized. Either scenario creates risk in a low-margin model where every dollar of excess inventory affects returns.
Why e-commerce growth matters without cannibalizing stores
Traditional retailers often face a dilemma where online sales erode profitable store traffic. Costco approaches this differently by treating e-commerce as complementary rather than competitive. Online orders often include bulky items that are difficult to transport from a warehouse, or specialty products not carried in every location.
Strong e-commerce growth in COST earnings demonstrates the company is adapting to changing shopping behaviors. Look for online sales growing faster than overall revenue without evidence of declining warehouse traffic. This combination suggests the company is capturing incremental demand rather than shifting sales from one channel to another.
The key question is whether digital investments improve the overall membership value proposition. If customers use both channels and renew at high rates, e-commerce strengthens the moat. If online sales come with compressed margins and don't drive store visits, the benefit becomes less clear.
What fresh food penetration says about differentiation
Fresh food categories including meat, produce, and bakery items drive frequent trips and differentiate Costco from online-only competitors. These categories also generate higher engagement because customers need to visit in person and often add other items to their carts while shopping.
Increasing fresh food penetration as a percentage of sales indicates the company is successfully pulling customers into warehouses more often. This matters for membership retention because frequent shoppers renew at higher rates. Watch for commentary about fresh food performance during earnings calls, as management often highlights this as a strategic priority.
How gross margin stability protects the business model
Most retailers aim to expand gross margins over time by raising prices or shifting to higher-margin products. Costco does the opposite. The company intentionally caps markups at roughly 14% on most items and passes savings to members. This keeps prices low, drives volume, and reinforces the value perception that justifies membership fees.
When analyzing Costco earnings, stable gross margins around 11-12% signal the model is working as designed. Expanding margins might seem positive but could indicate the company is raising prices and risking its value reputation. Contracting margins below 10% suggest the company is absorbing cost increases that could pressure profitability if sustained.
The trade-off matters because Costco sacrifices per-unit profit for volume and membership income. As long as membership fees cover a substantial portion of operating expenses, thin merchandise margins work. If membership growth stalls while margins compress, the model faces pressure from both sides.
What store opening pace reveals about confidence and capacity
New warehouse openings drive long-term growth but require significant capital investment. Each location costs tens of millions to build and takes time to reach mature productivity levels. The pace of openings signals management's confidence in the model and available growth runway.
A COST earnings analysis should include commentary on the pipeline of new locations and geographic expansion plans. Opening 20-30 warehouses per year historically indicates healthy growth without overextension. Accelerating significantly above this pace might strain operations or suggest management is chasing growth. Slowing below it could mean the company is running out of attractive locations or facing permitting challenges.
Pay attention to where new stores open. International expansion carries different risks and returns than domestic infill. Entering new countries requires building brand awareness and adapting the assortment, while adding stores in existing markets leverages established distribution and marketing infrastructure. Both strategies have merit, but the mix affects near-term profitability and long-term potential.
Try it yourself
Want to run this kind of analysis on your own? Copy any of these prompts and paste them into the Rallies AI Research Assistant:
- What are the 3-5 most important metrics I should focus on when evaluating Costco's earnings report, and what would strong vs. weak results look like for each one?
- What should I look for in Costco's next earnings report? What metrics matter most for this business?
- How does Costco's membership fee revenue compare to its total operating income, and what does this ratio tell me about the sustainability of their low-margin retail strategy?
Frequently asked questions
What makes Costco earnings different from typical retail earnings reports?
Costco operates on a membership model where most operating income comes from annual fees rather than merchandise markups. This means traditional retail metrics like gross margin expansion matter less than membership growth and renewal rates. Investors should focus on membership trends, comparable store sales, and inventory efficiency rather than expecting significant margin improvement over time.
How do I know if Costco's membership renewal rate is strong enough?
Renewal rates above 90% in North America and above 88% globally indicate strong member satisfaction and sticky recurring revenue. A decline of even two percentage points can signal competitive pressure or reduced perceived value. Compare quarter-over-quarter trends rather than focusing on a single data point, and look for management commentary explaining any meaningful changes.
What comparable store sales growth rate indicates healthy performance for Costco?
Comparable store sales growth between 5-8% typically reflects solid performance driven by a mix of traffic increases and modest ticket growth. Results below 3% may suggest weakening demand or competitive pressure, while results above 10% warrant closer examination to determine whether growth comes from sustainable factors like increased traffic or temporary factors like inflation or stockpiling behavior.
Why does Costco focus on inventory turnover more than most retailers?
Costco's business model depends on buying in massive volume, negotiating rock-bottom prices, and moving inventory before paying suppliers. Faster inventory turnover means less working capital tied up in merchandise and better cash flow. The company operates on margins around 11%, so efficiency in turning inventory directly impacts returns and funds growth without heavy borrowing.
Should I worry if Costco's gross margin expands significantly?
Expanding gross margins might seem positive, but Costco intentionally maintains thin margins to pass savings to members and reinforce its value proposition. Significant margin expansion could indicate the company is raising prices and risking its competitive advantage. Stable margins around 11-12% actually signal the model is working as designed, with volume and membership fees driving profitability.
How important is e-commerce growth to Costco's future?
E-commerce growth matters as a complement to warehouse traffic rather than a replacement. Strong online sales in categories like bulky items or specialty products that are hard to carry from stores indicate Costco is capturing incremental demand. The key is whether digital growth happens without cannibalizing profitable warehouse trips or compressing margins to compete with pure-play online retailers.
What store opening pace should I expect in a COST earnings preview?
Opening 20-30 new warehouses per year historically indicates healthy expansion without overextension. Accelerating significantly above this pace might strain operations, while slowing substantially could suggest the company is running out of attractive locations. Pay attention to the mix between domestic infill and international expansion, as each carries different risk and return profiles.
How does fresh food performance affect Costco's competitive position?
Fresh food categories including meat, produce, and bakery drive frequent warehouse visits and differentiate Costco from online competitors. Higher fresh food penetration as a percentage of sales indicates customers are making regular trips for perishables and typically adding other items while shopping. This frequent engagement drives higher membership renewal rates and creates a moat against pure-play e-commerce.
Bottom line
Understanding what to expect from Costco earnings means looking past headline numbers and focusing on the operational metrics that drive the membership-based warehouse model. Membership renewal rates, comparable store sales, inventory efficiency, and fresh food penetration reveal far more about long-term health than quarterly EPS fluctuations. By tracking these business-specific drivers, you can evaluate whether Costco is strengthening its competitive advantages or facing emerging pressures that might affect future performance.
Want to dig deeper into retail stocks and earnings analysis? Explore more frameworks and research tools on our stock analysis guide, or check out Costco's full research page for real-time data and AI-powered insights.
Disclaimer: This article is for educational and informational purposes only. It does not constitute investment advice, financial advice, trading advice, or any other type of advice. Rallies.ai does not recommend that any security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. All investments involve risk, including the possible loss of principal. Past performance does not guarantee future results. Before making any investment decision, consult with a qualified financial advisor and conduct your own research.
Written by Gav Blaxberg, CEO of WOLF Financial and Co-Founder of Rallies.ai.
