Costco’s Sales Rose 11.6%. Its Valuation Still Asks More.

Costco’s Q3 FY2026 results extended the company’s sales momentum. Total revenue increased 11.6% to $70.53 billion from $63.21 billion in the prior-year quarter. Net sales rose 11.6% to $69.15 billion, while membership-fee revenue increased 10.7% to $1.37 billion. Diluted EPS advanced 15.2% to $4.93 from $4.28, and net income increased to $2.19 billion from $1.90 billion, according to the Costco Q3 FY2026 earnings release.

The composition of growth was broad. Reported company comparable sales increased 9.8%, while comparable sales excluding gasoline-price and foreign-exchange effects rose 6.6%. On that adjusted basis, U.S. comparable sales increased 6.8%, Canada rose 6.2%, and other international markets grew 5.9%. Digitally enabled comparable sales increased 20.8%, materially faster than the warehouse-led business.

Margins were less decisive. Merchandise gross margin—calculated as net sales less merchandise costs, divided by net sales—declined to 11.0% from 11.2% a year earlier. Operating income rose 11.3% to $2.82 billion, but operating margin remained approximately 4.0%. EPS therefore grew faster than revenue without a meaningful operating-margin inflection; higher interest income and other income also contributed below operating profit.

Quarterly free cash flow was $2.04 billion, down from $2.33 billion in the corresponding prior-year period. The longer year-to-date view was better: operating cash flow for the first 36 weeks increased to $11.13 billion from $9.47 billion, while capital spending rose to $4.23 billion from $3.53 billion. That produced approximately $6.91 billion of year-to-date free cash flow, compared with $5.94 billion a year earlier. The quarterly decline should therefore be read alongside normal working-capital timing rather than as evidence of a broad cash-conversion problem.

The balance sheet strengthened further. Cash and cash equivalents reached $18.95 billion at May 10, 2026, compared with $14.16 billion at the fiscal-year opening, while long-term debt was $5.67 billion. The supplied quarterly financial data show net cash of $13.28 billion. These figures are consistent with the balance-sheet and cash-flow disclosures in Costco’s Q3 FY2026 Form 10-Q.

The quarter reinforces the strongest part of the Costco thesis: customers continue to spend through the company’s ecosystem at rates well above broad mature-retailer growth. Adjusted comparable sales of 6.6%, combined with membership-fee growth of 10.7%, indicate that expansion was not solely the result of gasoline prices, currencies or new warehouse openings. Digitally enabled growth above 20% also gives Costco another route to deepen member engagement without abandoning its warehouse economics.

The results do not, however, establish a new margin regime. Merchandise gross margin declined by roughly 0.2 percentage points, and operating margin was effectively unchanged at 4.0%. Costco’s model deliberately prioritizes member value over maximizing merchandise markups, so a low operating margin is not itself a weakness. It does mean that valuation upside must come primarily from sustained revenue growth, membership economics and disciplined capital deployment rather than a large margin-recovery story.

The distinction matters because the shares trade at 45.4 times trailing EPS of $19.88 and offer a 2.2% trailing free-cash-flow yield. Those figures leave little room for ordinary retail volatility. At this valuation, a solid quarter is necessary but not sufficient: the market needs Costco to sustain above-average growth for years while avoiding material pressure from wages, tariffs, merchandise costs or competitive pricing.

Financial quality remains an important counterweight. FY2025 ROIC was 23.5%, and the company has substantially more cash than debt. Costco can fund warehouse expansion and higher capital spending internally without relying on leverage. Q3 preserved that advantage, but balance-sheet strength alone does not make the current share price inexpensive. The central tension remains unchanged: Costco is performing like a quality compounder and is valued as though that performance will continue with minimal interruption.

There is no prior SageNoodle fair value to update, so this article establishes an initial base-case value of $795 per share. We use the supplied trailing EPS of $19.88 because management did not provide forward earnings guidance in the release. EV/EBITDA is not used because a complete trailing EBITDA figure was not disclosed in the supplied materials.

The bear case applies a 35.0 times multiple to trailing EPS, producing a rounded fair value of $696. This assumes comparable-sales growth moderates, merchandise-cost or wage pressure limits earnings growth, and Costco’s valuation premium contracts. Even 35.0 times earnings would remain a substantial multiple for a retailer, reflecting the company’s membership model, balance sheet and historical quality.

The base case applies 40.0 times trailing EPS for a fair value of $795. It assumes mid- to high-single-digit underlying comparable-sales growth can persist in the near term, membership revenue remains resilient and operating margin stays near 4.0%. The Q3 print supports those assumptions but does not justify raising the multiple further because gross margin declined and quarterly free cash flow was lower year over year.

The bull case applies 50.0 times trailing EPS, yielding $994 per share. That outcome requires sustained high-single-digit comparable-sales growth, continued digitally enabled momentum and EPS compounding above revenue growth without material margin erosion. At the current price of $902.38, the shares trade 13.5% above our $795 base value but remain within the 15% band required for a Fairly Valued verdict. The valuation risk is nevertheless elevated: upside to the bull value is only about 10%, while the bear case implies materially greater downside.

The cautious valuation could prove too low if Costco sustains double-digit total-revenue growth while membership fees and digitally enabled sales continue to outpace the core business. A faster warehouse rollout could also extend the company’s growth runway, though the supplied release does not provide opening guidance. If operating leverage emerges without weakening the member value proposition, earnings could support the bull-case multiple for longer than our base case assumes.

Conversely, the operating thesis would weaken if adjusted comparable-sales growth falls materially below the Q3 rate of 6.6% or if membership-fee growth decelerates sharply. Because merchandise margins are thin, tariffs, wage inflation, vendor actions or higher operating costs could pressure profit even if reported sales remain positive. Management’s release specifically identifies employee costs, tariffs, commodities, exchange rates and consumer spending patterns among the relevant uncertainties.

Cash conversion also bears watching. The year-to-date trend was healthy, but quarterly free cash flow declined despite double-digit earnings growth. Repeated divergence between earnings and free cash flow—particularly if capital expenditure continues rising—would reduce the value of reported EPS growth.

The most immediate risk is valuation rather than solvency or business durability. At 45.4 times trailing earnings, even a modest slowdown could compress the multiple before earnings have time to catch up. The quarter showed that Costco remains operationally strong; it did not show that the company has become structurally more profitable. That is why fair value starts below the market price despite the favorable sales and EPS comparisons.