Costco (COST) Doesn’t Need a Blowout Q3. Steady Renewals May Be Enough

Costco Wholesale (COST) is set to report Fiscal Q3 earnings after the closing bell on May 28, but I do not think the company needs a spectacular quarter to keep investors confident in the story. To be fair, while Costco shares have rebounded so far in 2026, the stock is once again trading at a very demanding valuation. However, I believe the current price-to-earnings multiple still appears supported by the resilience of the company’s membership-fee model.

That is why renewal trends matter so much this quarter. After a period of volatility, the last two quarters suggest worldwide renewal rates may have already stabilized. If that continues in Q3, I believe it would reinforce confidence in the membership-based warehouse club’s ability to keep generating steady, high-quality earnings growth. That is why I remain bullish on COST despite the demanding valuation.

Costco’s Low-Margin Model Is Its Biggest Competitive Advantage

One of the most fascinating aspects of Costco’s business model, in my view, is how different its margin structure looks compared to virtually every other major retailer in the U.S. Over the past 12 months, Costco’s gross margin stood at just 12.9%, well below peers such as Walmart (WMT) at 24.9% and a more “pure-play” comparable like BJ’s Wholesale (BJ) at 18.6%.

At the same time, when we compare net profit margins side by side, Costco stands at 3%, virtually tied with Walmart and 30 basis points above BJ’s Wholesale. Basically, this shows that Costco doesn’t need to make much money on the product to make a lot of money from the customer. The product is really the vehicle for the membership and the relationship, not the primary profit engine for Costco.

Rather than relying primarily on merchandise markups like Walmart, BJ’s, Kroger (KR), and Target (TGT), Costco operates under a model that is almost like “retail as a service.” In other words, the company deliberately keeps gross margins very low to reinforce its value proposition, drive traffic, and increase customer loyalty and membership renewals.

Why Costco Deserves Its Premium Valuation

The fact that Costco generates net margins comparable to those of Walmart and BJ’s despite much lower gross margins is arguably the main reason the company deserves a premium valuation. Costco shares trade at roughly 51x forward earnings, more than 2.5x the industry average of low-20x and above its own historical average.

This premium reflects Costco’s extremely efficient business model. Rapid inventory turnover compensates for the low margin earned on each item sold, and membership fees account for a significant portion of overall profitability.

To be more precise, Costco does not explicitly disclose how much of its operating income comes from membership fees. However, this recurring revenue stream likely accounts for the majority of the company’s operating profit.

In the most recent quarter, Costco reported $68.2 billion in net sales and $1.35 billion in membership fee income, while operating income totaled just $2.6 billion. Considering that membership fees carry nearly 100% margins, this implies that more than half of Costco’s operating profit likely came from membership fees rather than from the sale of merchandise itself.

The Metric That Matters Most in Q3

The best part about having membership fees as the primary driver of operating income is that Costco’s members are exceptionally loyal. As a result, the company’s bottom line becomes highly predictable. That is why I view the worldwide membership renewal rate as the single most important metric to monitor ahead of the upcoming Q3 earnings report.

As shown in the chart below, Costco’s worldwide renewal rate remained at an astonishing 90.5% from 2023 through March of last year. That period coincided with a strong rally in the stock, with Costco shares gaining roughly 60%.

In the quarters that followed, however, renewal rates began to decline slightly. According to management, this was largely due to the growing mix of new digital members, who tend to be younger and renew at somewhat lower rates than members who sign up in the warehouse.

While the decline may seem modest in absolute terms, it is still meaningful for a stock that was trading at more than 60x earnings at the beginning of last year. When valuation is this demanding, even small signs of inconsistency in Costco’s most important economic engine can have an immediate impact on investor sentiment.

Stability May Be Enough to Keep the Rally Going

After a rare stretch of underperformance from May of last year through the beginning of this year, Costco shares have rebounded over the past two quarters. Worldwide membership renewal rates also appear to have stabilized at approximately 89% for two consecutive quarters.

That being said, management has not explicitly guided on where worldwide renewal rates will land in Q3. The message was more nuanced. Renewal rates appear likely to remain stable in the near term, although there could still be modest pressure for a few more quarters before the metric begins to improve again.

In my view, the recovery in Costco shares so far this year suggests that the market is already anticipating that membership metrics will remain satisfactory, though not necessarily re-accelerate meaningfully.

Is COST a Buy, According to Wall Street Analysts?

The consensus among Wall Street analysts is that Costco Wholesale stock is a Moderate Buy. Among the 22 analysts who have covered COST over the past three months, 15 recommend Buy, six rate the stock as Hold, and one recommends Sell. Despite a few price target increases in recent days, the average price target currently stands at $1,102.19, implying a modest upside of just 0.72% from current levels.

The Premium Still Appears Justified

I view Costco’s outlook constructively ahead of its Q3 earnings print. Although COST continues to trade at very demanding multiples, the stock has already proven that it can thrive at these valuation levels as long as its membership-fee engine remains resilient.

On the few occasions over the past several years when this engine showed even slight signs of inconsistency, the impact was reflected almost immediately in the share price.

Based on management’s recent commentary, Q3 will most likely bring continued stability rather than a meaningful re-acceleration in membership trends. In my view, that alone should be enough to keep the bullish momentum intact.