⚠ The Reward Is a Liability That Grows With SuccessLow threat

Costco Wholesale (COST) — threat to the moat

Every extra dollar an Executive member spends costs two cents against a fee that does not rise with it.

The Executive 2% reward is accounted for as a reduction of net sales, allocated to the category in which it was generated1, and accrues on the balance sheet until the certificate is redeemed. At the third quarter of fiscal 2026 that accrual stood at $2,948 million, up from $2,677 million at the end of fiscal 20252.

Accrued member rewards ($M)$2,435MFY2024$2,677MFY2025$2,948MQ3 FY2026Equal to 8.9% of FY2025 gross margin dollars of $30,026M.
Every extra dollar an Executive member spends costs Costco two cents against a fee that does not rise with it. The liability is designed to grow, which is fine until it grows faster than the margin it is drawn against.

The number grows with two things at once: the number of Executive members and how much they spend. Both are strategic priorities, so the liability is designed to grow. That is fine while the reward does what it is meant to — bring the member back to redeem it, at which point Costco captures a further basket at full price. It is less fine as a share of the merchandise profit it is drawn against, because the merchandise half of operating income was only $5,060 million in fiscal 2025.

The subtle risk is mix. A reward capped at $1,250 a year is unconstrained for the overwhelming majority of members, so the cost scales linearly with Executive spending, while the offsetting benefit — the extra $65 fee — is fixed per member. Every incremental dollar an existing Executive member spends therefore costs Costco two cents against a fee that does not increase.

That is a deliberate trade and the right one at current spending levels. It stops being obviously right if Executive penetration keeps climbing past three-quarters of sales while merchandise gross margin is flat, because at that point Costco is funding a growing discount out of a profit pool that is not growing with it. Watch accrued member rewards against gross margin dollars: 8.9% of fiscal 2025's $30,026 million3 is comfortable; a steady climb from there is not.

References
  1. ReportedThe Executive 2% reward is accounted for as a reduction of net sales, allocated to the category in which it was generated, and accrues on the balance sheet until the certificate is redeemed.
    Costco Form 10-K, fiscal year ended August 31, 2025 - Item 7 MD&A (net sales $269,912M, membership fees $5,323M, gross margin 11.12%, SG&A 9.25%, comparable-sales composition, capital expenditure, dividends and repurchases) — FY2025 · publ. October 8, 2025 · source ↗
  2. ReportedAt the third quarter of fiscal 2026 that accrual stood at $2,948 million, up from $2,677 million at the end of fiscal 2025.
    Costco Form 10-Q, quarter ended May 10, 2026 - condensed financial statements and notes (total revenue $70,527M, operating income $2,815M, diluted EPS $4.93, balance sheet, segment table, 928 warehouses) — Q3 FY2026 and the first 36 weeks · publ. June 3, 2026 · source ↗
  3. Moat Explorer calcWatch accrued member rewards against gross margin dollars: 8.9% of fiscal 2025's $30,026 million is comfortable; a steady climb from there is not.
    Moat Explorer calculation - arithmetic on figures reported in Costco's Form 10-K and Form 10-Q: accounts payable less merchandise inventories ($1,667M at FY2025 and $2,945M at Q3 FY2026), foods and sundries plus fresh foods ($147,552M), Executive memberships over paid memberships (38.7M / 81.0M = 47.8%), accrued member rewards over gross margin dollars ($2,677M / $30,026M = 8.9%), the $1,250 reward cap divided by the 2% rate ($62,500), and Other International revenue as a share of the total — FY2025 and Q3 FY2026 · publ. September 2026 · source ↗
Sources
Generated September 23, 2026