Costco's Earnings Slightly Miss Expectations, but Future Growth Potential Remains Strong!

TradingKey - Costco's impressive growth in sales and operating income highlights its strong performance, though it slightly missed analyst expectations. With a loyal customer base and booming e-commerce, the company is well-positioned despite external challenges.

Key Financial Highlights  

• Net Sales: Net sales for the quarter increased by 9.1% YoY to $62.53 billion, up from $57.33 billion in the previous year. However, this fell short of analyst expectations, which had forecasted $63.11 billion. 
• Operating Income: Operating income grew by 12.32% YoY to $2.32 billion, reflecting the company’s effective cost management and revenue generation strategies. 
• Net Income: Net income for the quarter was $1.79 billion, or $4.02 per diluted share, which was below the expected $4.11 per share. This compares to net income of $1.74 billion, or $3.92 per diluted share, in the previous year, reflecting a 3% YoY increase. The results were positively impacted by a $94 million ($0.21 per diluted share) tax benefit due to the deductibility of the $15 per share special dividend. 
• Membership Fees: Membership fees increased by 7.38% YoY to $1.19 billion, but this was below the expected $1.22 billion. The number of paying members grew by 6.8% YoY to 78.4 million, while total cardholders rose by 6.6% YoY to 140.6 million. The global membership renewal rate reached 90.5%, with renewal rates in the U.S. and Canada exceeding 93.0%. 

Comparable Store Sales 

• U.S.: U.S. sales increased by 8.6%, indicating consistent growth in the domestic market. 
• Canada: The reported growth rate for Canada was 4.6%, but the adjusted growth rate was 10.5%. This difference suggests that fluctuations in gasoline prices and foreign exchange rates negatively impacted reported growth. 
• Other International: For other international markets, the reported growth rate was 1.7%, but the adjusted growth rate was 10.3%. This indicates that currency fluctuations and gasoline price changes had a dampening effect on reported growth. 
• E-commerce: E-commerce sales grew by 20.9%, with an adjusted growth rate of 22.2%, reflecting strong performance in the digital retail segment. 

Investment Outlook 

Management noted that Costco continues to gain market share from retail competitors like Walmart and Target, both through comparable store sales and its e-commerce business. While the Trump administration's tariff policies have introduced uncertainty, leading customers to become more selective due to higher prices and tariffs, Costco’s large and highly loyal membership base—with its high renewal rates—demonstrates the recognition of Costco's value proposition. This customer loyalty could potentially provide Costco with a competitive advantage during inflationary pressures. 

The post-market decline in Costco’s stock is not unexpected, as the stock is nearing historical highs. Costco's forward price-to-earnings (P/E) ratio is approaching 60x, with its forward price/earnings-to-growth (PEG) ratio close to 4. Such high valuations reflect market expectations of significant growth in Costco’s performance, meaning that investor expectations are very high. However, Costco will likely continue to be impacted by ongoing challenges, including the effects of tariffs and foreign exchange fluctuations. As a result, close attention should be paid to the company’s performance over the next few quarters to assess whether these expectations are met, while factoring in these external pressures.