Costco (COST) Q1 2026: Digital Comps Up 20.5% as Personalization and AI Fuel Member Engagement
Costco’s Q1 2026 results spotlighted a step-change in digital engagement, with digitally enabled comparable sales up 20.5% year over year, reflecting rapid adoption of personalization, AI, and operational tech. Warehouse expansion, executive membership upgrades, and strong ancillary business growth reinforced the core value proposition, even as renewal rates softened slightly due to digital member mix. Management’s focus on technology-driven productivity and relentless price investment continues to widen Costco’s competitive moat heading into 2026.
Summary
- Digital Momentum: Personalization and AI initiatives are driving record digital sales and engagement.
- Warehouse Expansion: New formats and relocations are accelerating sales maturity and market share gains.
- Membership Leverage: Executive upgrades and targeted retention mitigate slight renewal softness from digital sign-ups.
Performance Analysis
Costco’s Q1 2026 results revealed broad-based strength across core and ancillary businesses, with net sales up solidly and comparable sales growth of 6.4% both before and after adjusting for gas and FX. Digitally enabled comparable sales soared 20.5%, a clear outlier that underscores the traction of recent technology investments. Traffic rose 3.1% worldwide, while average transaction size increased 3.2%, signaling a healthy blend of frequency and ticket growth.
Membership fee income jumped 14%, with the September US and Canada fee increase accounting for less than half of that gain—organic growth in paid executive memberships and upgrades provided the rest. Renewal rates dipped by 10 basis points, mostly due to the growing share of digital sign-ups, but targeted communications have already shown early success in mitigating this decline. Gross margin improved by four basis points, reflecting supply chain efficiency, increased Kirkland Signature penetration, and higher marketing revenue, though this was partially offset by mix and lower co-brand credit card income. SG&A was essentially flat as investments in wages, hours, and healthcare were offset by productivity gains from technology and operational improvements.
- Digital Acceleration: Site traffic up 24% and app traffic up 48%—digital now leads all channels in growth velocity.
- Ancillary Outperformance: Pharmacy, hearing aids, and optical delivered strong comps, with pharmacy scripts up mid-teens thanks to AI-driven inventory.
- New Warehouse Productivity: FY25 openings generated $192 million per warehouse in year-one sales, up 28% from two years prior.
Costco’s operational model continues to deliver leverage in new markets and existing locations, while digital and tech investments are beginning to yield both member-facing and back-office productivity gains. The company’s ability to offset cost headwinds with efficiency and scale remains a key differentiator.
Executive Commentary
"Technology is going to be part of the peak part of our future. I think it's equally as important as all of our other initiatives that we have out there, but we will never succumb to not being the best price and driving prices down for our members. That's what Costco is known for, and that will always be our leading mantra."
Ron Bakris, Executive Vice President and Chief Operating Officer
"We have a pretty large alternative profit business that many other retailers would define that way today. Outside of financial services, we have a large travel business. We have a traditional sort of media revenue business that we generate meaningful dollars today. And both of those were actually travel and the sort of marketing and media revenue were tailwinds to our business in the quarter."
Gary Millerchip, Chief Financial Officer
Strategic Positioning
1. Digital and AI Integration
Costco’s digital transformation is moving from pilot to scaled execution. The company rolled out personalization features that boost relevant product recommendations, resulting in measurable sales lifts. AI, artificial intelligence, is now embedded in pharmacy inventory—improving in-stock rates to more than 98% and driving mid-teen script growth. Upcoming AI deployments in gas aim to optimize inventory and pricing, with similar member-centric, business-value orientation. Digital wallet, prescan checkout, and app enhancements are all designed to create a seamless omnichannel experience, reinforcing member loyalty.
2. Warehouse Expansion and Real Estate Creativity
Warehouse growth remains a core lever, with eight new openings in Q1 and a revised FY26 target of 28 net new locations due to Spain delays. The real estate team is increasingly creative, converting old hypermarts and home improvement stores to Costco warehouses and business centers, reducing capital intensity. Relocations of high-volume sites to larger footprints with better parking and expanded gas stations are delivering outsized sales lifts. International expansion, especially in Asia and Europe, is expected to remain a 50%+ share of new openings over the next five years.
3. Membership Model Resilience
The paid membership model, Costco’s primary profit engine, showed continued resilience. Executive upgrades accelerated, aided by extended hours and new digital benefits (like $10 Instacart credits). Renewal rate softness is attributed to a higher mix of younger, digitally acquired members, but targeted retention efforts have already slowed the decline. Management expects further improvement as engagement and personalization tools mature. The membership base now stands at 81.4 million paid members, up 5.2% year over year.
4. Alternative Profit and Retail Media Opportunity
Costco’s alternative profit streams—travel, credit card partnerships, and nascent retail media—are growing contributors. Retail media, digital advertising sold to suppliers, is in early innings but has begun to show promise as data and personalization capabilities scale. The company’s approach is to reinvest most of these profits into member value, deepening supplier partnerships and reinforcing the flywheel effect.
5. Kirkland Signature and Assortment Discipline
Kirkland Signature, Costco’s private label, is growing faster than the overall business, now offering 15% to 20% value versus national brands. Strategic assortment changes, including more US-sourced and tariff-insulated products, have helped mitigate inflation and supply chain risk. The company continues to be first to lower prices, especially on Kirkland items, reinforcing its price leadership narrative.
Key Considerations
This quarter’s results reflect a company executing on multiple vectors—digital, physical, membership, and alternative profit—while maintaining discipline on cost and value delivery.
Key Considerations:
- Digital Activation: Personalization and AI are now driving measurable sales and margin gains, with more runway ahead.
- Expansion Leverage: New and relocated warehouses are accelerating maturity curves and market share capture, especially in international markets.
- Membership Stickiness: Executive upgrades and targeted retention are offsetting renewal rate headwinds from digital member mix.
- Cost Control: Productivity gains from tech and process improvements are covering wage and healthcare inflation, maintaining SG&A leverage.
- Alternative Profit Scaling: Retail media and other profit streams are early but positioned to become more material over time.
Risks
Renewal rate softness remains a watchpoint as digital sign-ups renew at lower rates, though management is acting to close the gap. Healthcare cost inflation and wage investments could pressure SG&A if not offset by continued productivity gains. Tariff volatility, especially on non-food imports, requires ongoing assortment agility. International expansion carries execution risk, especially in less mature markets where regulatory and consumer dynamics differ.
Forward Outlook
For Q2 2026, Costco guided to:
- Continued high-single-digit net sales growth, with digital outpacing overall comps.
- Capital expenditures of approximately $6.5 billion for the full year, supporting 28 net new warehouses and expanded remodels.
For full-year 2026, management maintained its outlook for:
- 30+ annual net warehouse openings in future years
- Ongoing investment in digital, personalization, and AI to drive member engagement and operational efficiency
Management highlighted several factors that will shape results:
- Further digital and personalization enhancements, including expanded app features and AI deployment in gas and supply chain
- Continued focus on membership value, with new benefits and targeted retention to stabilize renewal rates
Takeaways
Costco’s Q1 2026 results demonstrate a business model that is both resilient and evolving, leveraging scale, technology, and membership economics to drive growth and defend margins.
- Digital and AI Integration: Early wins in personalization and AI are already driving sales and margin benefits, with further upside as adoption spreads across categories and geographies.
- Membership Model Strength: While renewal rates bear monitoring, executive upgrades and engagement initiatives are keeping the membership flywheel turning.
- Expansion and Alternative Profit: New warehouse formats and alternative profit streams provide multiple levers for sustained growth and margin expansion in an increasingly competitive retail landscape.
Conclusion
Costco’s Q1 2026 marks an inflection in digital and operational execution, with technology investments translating into real-world productivity and engagement. The company’s disciplined expansion, membership model, and cost leadership remain intact, positioning Costco to extend its competitive lead even as the retail landscape continues to evolve.
Industry Read-Through
Costco’s results reinforce the imperative for omnichannel retailers to rapidly scale digital personalization, AI, and alternative profit streams, not as bolt-ons but as core business drivers. The ability to blend physical scale with digital engagement is now table stakes for membership-based and mass retail models. Tariff mitigation, private label acceleration, and creative real estate strategies are increasingly critical as inflation and cost pressure persist. Competitors lagging in digital activation, member engagement, or alternative profit development risk ceding share to those with Costco’s execution discipline and scale.