Strong results, but valuation and slowing growth weigh
Costco (NASDAQ:COST) reported a robust fourth quarter, surpassing Wall Street forecasts with adjusted earnings per share of $5.87 and total revenue of $86.16 billion. Comparable sales rose 6.4%, with U.S. same-store sales up 6% and Canada leading growth at 8.3%. E-commerce also delivered a solid 15% jump.
Despite these numbers, shares dropped more than 2% on Friday. Investors appear cautious amid signs of moderating momentum. U.S. comp sales have slowed across recent quarters — from 8.3% in Q2 to 5.1% in Q4. With Costco trading at a premium valuation of 52x earnings and 57x free cash flow, its cash flow yield of just 1.8% has sparked concerns. For context, Amazon offers faster growth and broader exposure to high-margin businesses at lower multiples.
Membership growth and retail strategy remain solid
Membership fee income grew 14% year over year to $1.72 billion, and the number of cardholders rose 6.1%. CFO Gary Millerchip highlighted the importance of value and necessity in consumer behavior during economic uncertainty, citing staples like the $1.50 hot dog combo, rotisserie chicken, and Kirkland bath tissue as key drivers of customer loyalty.
In fiscal 2025, Costco sold over 245 million hot dog combos and 157 million rotisserie chickens, while total revenue hit $275.24 billion, beating projections. Same-store sales grew 7.6%, slightly ahead of the 7.5% forecast. Still, consumer spending remained cautious, with tighter budgets affecting discretionary items such as toys and home décor.
Competing in a shifting retail environment
Costco continues to adapt to a more competitive landscape. CEO Ron Vachris acknowledged the growing pressure from rivals, including Amazon’s same-day delivery push. Costco’s partnerships with Uber Eats and Instacart have expanded its same-day capabilities, which it describes as a “very good business” that’s growing at a healthy rate.
Oppenheimer analyst Rupesh Parikh noted that Costco shares, along with peers like BJ’s, Dollar General, and Kroger, have underperformed since Amazon’s delivery expansion. With Friday’s drop, Costco stock is now flat year-to-date, compared to the S&P 500’s 13% gain.
Adjusting for tariffs and preparing for holidays
To offset tariff pressures, Costco has diversified sourcing by increasing domestically produced goods and globally consolidating purchasing. The company also restructured its product mix, focusing more on health, beauty, live goods, and higher-ticket items like in-home saunas and furniture.
Heading into the holiday season, Costco buyers have rebalanced inventory between essential and discretionary items. While traditional categories like toys and decorations were reduced, premium items gained floor space, reflecting a shift in strategy based on evolving consumer preferences and supply chain realities.
