Costco’s quarter wasn’t perfect, but most of the metrics that matter to investors were solid
Costco reported stronger-than-expected quarterly results Thursday evening, with both sales and adjusted earnings per share topping estimates, driven by robust membership fee growth and margin expansion. Total revenue in the company’s fiscal 2025 fourth quarter increased 8% year over year to $86.16 billion, topping Wall Street expectations of $86.06 billion, according to estimates compiled by LSEG. Adjusted EPS for the 16 weeks ended Aug. 31 rose 11% from the year-ago period to $5.87, beating the consensus of $5.80, LSEG data showed. COST YTD mountain Costco YTD Shares of Costco were slightly lower in after-hours trading. The stock has been stuck in a downtrend since spiking to above $1,050 in early June when investors rushed into the stock for its high quality and defensive attributes. Bottom line Costco once again delivered a steady quarter, even as tariffs and a cautious consumer added volatility to the retail environment. While the results weren’t perfect, we were pleased to see gross margins continue their upward trajectory. The company credited improvements to its supply chain as a reason for the margin improvement, and an increase in Kirkland Signature penetration continued to be a secret weapon against fighting inflation and keeping prices down. “We continue to work closely with our suppliers to find ways to mitigate the impact of tariffs, including moving the country of production where it makes sense, and consolidating our buying efforts globally to lower the cost of goods across all our markets,” CFO Gary Millerchip said on the earnings call. “Additionally, we are changing item assortment where appropriate. This includes leaning into KS [Kirkland Signature] items and increasing domestically sourced goods.” Why we own it Costco is the best-run retailer in the world, with a business model focused on offering its members a relatively small universe of products at hard-to-beat prices. Costco has succeeded for decades, but the high inflation of recent years has made the company’s value-focused ethos really shine. Competitors: BJ’s Wholesale , Walmart , fellow Club holding Amazon Last buy: June 15, 2020 Initiation date: Jan. 27, 2020 In an area in need of improvement, Costco’s membership renewal rates dipped, and that’s expected to continue over the next few quarters. There’s a trade-off happening, with the company enjoying an increase in online signups, which it likes because those skew toward a younger demographic. However, online signups tend to renew at a lower rate. Still, these were solid results overall, and Costco is still one of the highest quality companies we follow, which is why we continue to hold a 2 rating, meaning we’ll wait for a pullback before buying more. But given the stock’s high price-to-earnings multiple valuation, the quarter probably won’t be an overnight catalyst. We’re also reiterating our $1,100 per share price target. Commentary Total fiscal Q4 comparable sales, an important retail industry metric, increased 5.7% for the second quarter in a row, but the 6.4% on an adjusted basis represented a deceleration from the prior quarter. Adjusted comps, which exclude changes from gasoline prices and foreign exchange, were driven by a 3.7% increase in traffic. There was also a 2.6% increase in adjusted comparable ticket. Taken together, more shoppers entered Costco warehouses, and they paid higher prices at checkout. By category, fresh food comps increased high single digits on a percentage basis in fiscal Q4, while food and sundries increased mid to high single digits. Non-food increased in the high single digits, and some outperforming categories were gold and jewelry, gift cards, large ticket items, toys, and men’s apparel. All were up double digits. As mentioned, gross margins improved 13 basis points versus the year-ago period to 11.13%, missing the consensus estimate. Gross margins improved 3 basis points, excluding gas deflation. Core merchandise was the largest driver of the year-over-year gross margin improvement. It increased by 30 basis points. There was an 11-basis-point headwind from Costco’s ancillary and other businesses, which include pharmacy, food courts, and travel. Gas was the main driver of the decline. Last in, first out (LIFO) accounting also had a 6-basis point negative impact on gross margins. The headwind was from a $43 million charge compared to an $8 million credit last year. Costco’s paid memberships increased in the quarter, but not by as much as the market anticipated. Total paid memberships ended the quarter at 81 million, an increase from 79.6 million in the prior quarter, but below the consensus estimate of 81.5 million. Still, membership was up 6.3% year over year. Membership renewal rates trended lower again, with the worldwide rate and the U.S. and Canada rate declining to 89.8% and 92.3%, respectively, from 90.2% and 92.7% in the prior quarter. In addition to new online memberships that tend to renew at a lower rate, a large Groupon campaign in December 2023 was a headwind as well. Management continues to expect renewals to decline in the quarters ahead because of its growing online base, but the company is planning to focus on auto-renewal and targeted digital communications to improve the renewal rate of these online signups. Perhaps more importantly, membership fee growth accelerated to 14% from 10.4% one quarter ago. Costco raised the price of its membership last year, driving a step up in fee income over last year. But the company also highlighted upgrades from its Gold Star membership to Executive membership as another positive factor. Members are upgraded to the Executive tier to take advantage of the exclusive operating hours in the morning and $10 credit per month on Instacart purchases that meet a minimum basket. The company’s decision to keep United States warehouses open an extra hour Saturday evenings has also been well received. Growth plans In the entire 2025 fiscal year, Costco opened 27 new warehouses, including three relocations, for a total of 24 net new buildings. For fiscal 2026, the company is planning to open another 35 warehouses, including five relocations, for a total net new of 30 warehouses. We are pleased to see this accelerated pace of warehouse growth. (Jim Cramer’s Charitable Trust is long COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. 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