The financial report did not meet expectations, Costco fell after hours

The American warehouse retail giant Costco's profits slightly fell short of Wall Street expectations, and coupled with the uncertainty of tariff policies, its stock price dropped in after-hours trading.

On March 6, Costco reported its second fiscal quarter, showing revenue of $63.7 billion, slightly above the market expectation of $63.1 billion. Same-store sales grew by 6.8%, also exceeding the expected 6.4%. However, earnings per share were $4.02, below the analyst expectation of $4.09. Foreign exchange conversion had a negative impact of 13 cents on earnings per share.

Specifically:

Net sales for the second quarter reached $62.53 billion, a year-on-year increase of 9.1%. Net sales for the first 24 weeks grew by 8.3%, reaching $123.52 billion.

Net profit for the second quarter was $1.788 billion, with diluted earnings per share of $4.02, a year-on-year increase of 2.6%. Excluding last year's $0.21 per share tax benefit, the actual growth was 8.4%.

Same-store sales for the second quarter grew by 6.8%, with the U.S. growing by 8.3% (adjusted 8.6%), Canada growing by 4.6% (adjusted 10.5%), and other international markets growing by 1.7% (adjusted 10.3%).

E-commerce website traffic grew by 13%, average order value increased by 10%, and Costco's logistics and distribution grew by 19%.

After the earnings report was released, Costco's stock price fell by 1.4% in after-hours trading to $1,013. Nevertheless, the stock has still risen 12% this year, outperforming the S&P 500 index.

Performance Pressure Under High Valuation

The drop in Costco's stock price is not surprising. According to Barron's, Costco's stock price is close to historical highs, with a price-to-earnings ratio nearing 55 times next year's expected earnings. Such high valuation reflects the market's expectations for significant growth in Costco's performance.

Dave Wagner, a portfolio manager at Aptus Capital Advisors, stated:

The company's stock performed remarkably last year, so investors have high expectations.

The tariff policies of the Trump administration have cast a shadow over Costco's future. Although the White House announced on Thursday that it would suspend tariffs on imports from Mexico and Canada, it remains unclear which categories of goods will still be subject to tariffs.

Costco CEO Ron Vachris stated in a conference call with investors that, given market volatility, it is "difficult to predict" the overall impact of tariffs, and our goal is to minimize the impact of related cost increases on our members He added:

About one-third of Costco's sales in the U.S. come from imports, with less than half coming from China, Mexico, and Canada.

Currently, Costco has not seen a decline in spending due to increased macroeconomic uncertainty, but executives have stated that as tariffs take effect and prices begin to rise, consumers may become more "selective."

The Advantage of Membership Fees or Easing Pressure

Costco's membership model has been key to its revenue growth. The financial report shows that membership fee revenue grew by 7.4% in the second quarter, reaching USD 1.193 billion. Excluding the impact of exchange rate fluctuations, membership fee revenue growth was as high as 9.4%.

The number of paid members reached 78.4 million, a year-on-year increase of 6.8%.

The total number of cardholders reached 140.6 million, a year-on-year increase of 6.6%.

The global membership renewal rate reached 90.5%, with the renewal rate in the U.S./Canada as high as 93.0%.

High-end members (Executive Members) accounted for 73.8% of sales.

Costco's members are not only numerous but also highly loyal, the high renewal rate proves members' recognition of Costco's value proposition. Costco continues to introduce new member benefits, such as improved KS diapers, KS vodka soda, etc., and gives back to members by lowering prices on certain products. These initiatives further enhance member stickiness and consolidate Costco's competitive advantage.

This also means that Costco may have an advantage over competitors when facing inflationary pressures. Edward Jones analyst Bryan Yarbrough pointed out:

Membership fees account for a large portion of Costco's operating profit, allowing the company to generate profits at lower prices than other retailers