After a powerful multi-year run, Costco Wholesale (COST -0.90%) has finally given investors something to worry about (or has it?): Membership renewal rates slipped in its most recent quarter. That's a meaningful headline because the membership warehouse club's economics are built on recurring fee income and consistently high renewals.
But the full story is more nuanced. Membership fee dollars rose briskly and paid memberships grew nicely. Further, management provided a good excuse for renewal rate pressure.
The bigger question for investors right now is arguably whether a premium valuation leaves little room for disappointment.
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Renewals softened, but context matters
Start with the numbers. At quarter-end, Costco's U.S. and Canada renewal rate stood at 92.3% and the worldwide rate was 89.8% -- both down about 40 basis points from the prior quarter (92.7% and 90.2%) and even further below the 2024 levels.
During its second-quarter earnings call, Costco CFO Gary Millerchip was explicit about the drivers: "The decline in renewal rates was largely attributable to a higher number of online sign-ups entering the renewal rate, and this quarter included a large Groupon campaign in December 2023 entering the calculation."
That mix shift matters because digital cohorts typically renew at slightly lower rates than in-warehouse sign-ups, especially in their first renewal cycle.
Importantly, the renewal downtick did not translate to weaker fee dollars. Membership fee income rose 14% year over year in the quarter to about $1.72 billion, aided by last year's membership fee increase in the U.S. and Canada, and ongoing upgrades to the executive tier. Paid memberships reached roughly 81 million, up about 6% from a year ago, with executive members approaching 39 million and accounting for more than 74% of sales. Management also highlighted operational changes that are resonating with high-value members -- like extended hours and a monthly Instacart credit -- which helped drive upgrades and contributed roughly a 1% lift to weekly U.S. sales.
Therefore, the signal from renewal rates is mixed rather than negative. Yes, the headline percentage slipped. But the core engine -- more members, more executive members, and higher fee income -- was firing on all cylinders. This engine is what ultimately leads to scale and helps support Costco's enduring ability to fund low prices, which in turn supports renewals over time.
The real risk is valuation, not renewal drift
Of course, investors should look for renewal rates to stabilize over the next few quarters; persistent pressure would be a yellow flag if it outlasts the online-cohort explanation.
More importantly, however, they should note that the stock's valuation already bakes in excellence. Using the company's just-reported trailing-12-month earnings of $18.21 per share for fiscal 2025 and a recent share price around $916, Costco trades at about 50 times earnings -- a steep premium even for a best-in-class retailer.
Sure, business momentum remains impressive. Quarterly net sales rose 8%, comparable sales increased in the mid-single digits (and 6.4% when excluding fuel and currency changes), and e-commerce grew about 14%. Those results, together with rising membership fee income and steady new warehouse openings, reinforce the long-term durability of Costco's model. But at roughly 50 times earnings, shares leave little room for any stumbling -- whether that's stickier-than-expected renewal softness from digital cohorts, slower upgrade activity, or macro-driven pullbacks in big-ticket discretionary categories.
Where does that leave investors? Renewal rates appear to be under temporary pressure for understandable reasons, and the underlying membership fee engine is still growing nicely. That combination suggests there's little cause for alarm today. But the stock's premium valuation is a separate issue, and the smarter move may be to stay on the sidelines and wait for a more reasonable entry price.
In short, the membership story remains compelling. The caution is about what you are paying for it.
