Costco Wholesale Corp (COST) Q1 Earnings Analysis: Revenue Miss Triggers Market Decline Despite Strong Comparable Sales

TLDR

Costco reported Q1 FY2026 results that fell short of analyst expectations, with revenue of $65.98 billion missing the $67.12 billion estimate by $1.14 billion. EPS of $4.50 also missed the consensus, though this beat was overshadowed by the revenue shortfall. The stock declined 0.82% (-$7.24) as investors reacted negatively to the top-line miss despite strong 6.4% comparable sales growth and robust 20.5% digital sales expansion.

Key takeaway: The underlying business remains resilient, but the near-term revenue miss raises questions about momentum relative to lofty Wall Street expectations and the pace needed to hit full-year targets.

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Financial Performance

Revenue

• Q1 Revenue: $65.98 billion vs. $67.12 billion (estimated) - Miss by $1.14 billion (-1.7%)
• Year-over-Year Growth: 8.2% ($65.98B vs. prior year $60.99B)
• Key Revenue Drivers:
  • Comparable sales increased 6.4% on an adjusted basis (excluding gas and FX impacts)
  • Digital sales surged 20.5%, underscoring strong e-commerce momentum
  • U.S. comparable sales grew 5.9%, Canada 9.0% (adjusted), and Other International 6.8% (adjusted)
  • Membership fee revenue increased 14.0% to $1.329 billion from $1.166 billion
  • Total revenue including membership fees reached $67.31 billion, up 8.3% year-over-year

Profitability Metrics

• Adjusted EPS: $4.50 vs. $4.28 (estimated) - Beat by $0.22 (+5.1%)
• Net Income: $2,001 million vs. $1,798 million prior year (+11.3%)
• Operating Margin: 3.66% (operating income of $2,463M on total revenue of $67,307M)
• Key Profitability Factors:
  • Operating income grew 12.2% to $2,463 million from $2,196 million
  • Tax benefit of $72 million ($0.16 per share) from stock-based compensation, down from $100 million ($0.22 per share) last year
  • Merchandise costs as a percentage of net sales stayed effectively flat at 88.7% (flat)
  • SG&A expenses increased to $6,334 million from $5,846 million, representing 9.4% of total revenue

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Operational Highlights

Costco demonstrated solid operational execution during the quarter despite the revenue miss. The company's comparable sales growth of 6.4% (adjusted for gas prices and foreign exchange) reflects healthy consumer demand across its membership base. The 20.5% surge in digitally-enabled sales indicates a successful omnichannel strategy, positioning the retailer well for evolving shopping preferences.

• International strength stood out, with Canada posting a 9.0% adjusted comparable sales growth and Other International markets achieving 6.8% growth.
• Membership fee revenue rose by 14.0%, signaling strong member retention and potential benefits from recent or ongoing membership-fee adjustments.
• Costco expanded to 923 warehouses globally, aligning with its disciplined growth framework.
• Operating leverage improved, with operating income rising faster than revenue (up 12.2% vs. 8.2% top-line growth), suggesting pricing power and efficient cost management amid inflationary pressures.

However, the $1.14 billion revenue shortfall versus analyst expectations raises questions about whether comparable sales momentum will be enough to meet Wall Street growth targets, especially as the company faces tougher year-over-year comparisons in upcoming quarters.

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Forward Outlook

Near-Term Guidance (Q2 FY2026)

• Revenue Guidance: Not provided vs. $68.95 billion (estimated)
• EPS Guidance: Not provided vs. $4.50 (estimated)
• Management Commentary: Management did not provide specific guidance for Q2, which is typical for Costco. The Q1 revenue miss creates uncertainty about whether the company can achieve the $68.95 billion analyst consensus for the next quarter, which would require roughly 4.5% sequential growth.

Takeaway: The absence of formal Q2 guidance injects near-term ambiguity, and investors will be watching for any quarterly cadence signals that could point toward accelerating momentum or a continued lag.

Full-Year Fiscal 2026 Outlook

• Updated Revenue Target: Not provided vs. $297.04 billion (estimated)
• Updated EPS Target: Not provided vs. $20.07 (estimated)
• Strategic Initiatives:
  • Continued warehouse expansion with disciplined site selection
  • E-commerce platform enhancements to sustain 20%+ digital growth
  • International market penetration, particularly in Asia and Europe
  • Membership value proposition optimization following fee increases

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Investment Implications

For Long-Term Holders: The Q1 results present a mixed picture. While the revenue miss is concerning, the underlying business fundamentals remain solid with healthy comparable sales growth, strong membership fee revenue, and improving profitability. The 11.3% net income growth and operating leverage expansion demonstrate Costco's pricing power and operational efficiency. Long-term investors should monitor whether the revenue shortfall represents a temporary timing issue or signals broader demand challenges. The stock’s modest decline of 0.82% suggests the market views this as a minor setback rather than a fundamental deterioration, but patience is warranted as the company navigates tougher comparisons.

For Traders: The revenue miss and lack of formal guidance create near-term uncertainty. The stock’s negative reaction, while relatively muted, indicates caution is warranted. Traders should watch for Q2 monthly sales reports to gauge whether comparable sales trends are accelerating or decelerating. The $1.14 billion revenue miss translates to a meaningful 1.7% miss that could pressure the stock if the trend persists.

Trading takeaway: If Costco demonstrates a noticeable uptick in Q2 momentum or provides clearer incremental guidance, that could catalyze a relief rally. Conversely, persistent top-line softness could reprice expectations for the full year.

For Institutional Investors: Costco’s valuation premium requires consistent execution and meeting/beating expectations. The Q1 revenue miss, while accompanied by an EPS beat, may prompt earnings estimate revisions lower for the full year. Institutions should assess whether the $297.04 billion full-year revenue target remains achievable given the Q1 shortfall. The company would need to average roughly $66.3 billion in revenue for the remaining three quarters to hit this target, implying about 8.7% growth—achievable but requiring acceleration from Q1’s 8.2% pace.

Portfolio note: A disciplined approach to price/volume mix, cost containment, and member value will be critical to maintaining Costco’s premium multiple while delivering the visibility required by institutional holders.

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Summary

Costco's Q1 FY2026 results revealed a tale of two metrics: strong profitability but disappointing revenue. The $65.98 billion in revenue missed analyst expectations by $1.14 billion, triggering a 0.82% stock decline despite an EPS beat of $4.50 versus $4.28 estimated. While year-over-year revenue growth of 8.2% and comparable sales growth of 6.4% demonstrate solid business momentum, the shortfall versus expectations raises questions about whether Costco can achieve the aggressive $297.04 billion full-year revenue target.

The positives include robust 20.5% digital sales growth, 14.0% membership fee revenue expansion, and 12.2% operating income growth that outpaced revenue gains. International markets showed particular strength with Canada and Other International posting high single-digit adjusted comparable sales growth.

However, investors should exercise caution given the revenue miss and absence of formal guidance. The company must demonstrate accelerating momentum in Q2 to reassure the market that full-year targets remain achievable. While Costco's business model and competitive positioning remain strong, the Q1 results suggest that meeting elevated Wall Street expectations may prove challenging in the current environment. The modest market reaction indicates investors are adopting a wait-and-see approach, making the next quarter's results critical for determining whether this was a temporary stumble or the beginning of a more concerning trend.

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