Is there a sudden change in the US stock market? But with Costco, it's "as solid as a rock."

On March 7th, after the US stock market closed, $ Costco Wholesale.US released its Q2 financial report for the fiscal year 2025 (for the 12 weeks ending February 16). Overall, this report shows strong growth, but profits fell slightly short of expectations. Specifically:

In terms of core operating metrics, this quarter, Costco's overall same-store sales growth across all regions was 6.8%, significantly accelerating compared to the previous quarter and exceeding sell-side expectations by 0.4 percentage points. After excluding the impact of oil price fluctuations and exchange rates, the overall same-store comparable growth rate reached as high as 9.1%, an increase of a full 2 percentage points quarter-on-quarter. However, the company's monthly disclosures for December and January showed that the growth excluding oil prices and exchange rates was over 9%, indicating that the market had relatively strong expectations for this robust growth.

From the perspective of price and volume drivers, it can be broken down into a 5.7% increase in same-store traffic and a 1% increase in same-store average spending per customer. In terms of trends, both traffic and average spending per customer showed quarter-on-quarter increases, with significant growth. Notably, this quarter marked the first time since the start of fiscal year 2023 that the average spending per customer increased by more than 1% year-on-year.

By region, same-store sales in the US/Canada/other international regions grew by 8.3%/4.6%/1.7% respectively. It is evident that the strong growth this quarter was primarily driven by the US region, which saw a quarter-on-quarter increase of 3.1 percentage points, while same-store growth in Canada and other international regions slowed quarter-on-quarter. However, this was mainly due to the drag from exchange rate factors; after excluding exchange rates and oil and gas prices, the same-store growth rates in Canada and international regions also reached 10%.

Similarly, when broken down by price and volume, the same-store average spending per customer in the US region increased by 2.6% year-on-year this quarter, marking the first time since the last inflation and interest rate hike cycle (fiscal year 22-23) that there was an increase of over 1% in average spending per customer. This seems to suggest a resurgence of consumer inflationary pressures.

As a new growth driver in the post-pandemic era, Costco's e-commerce sales grew by as much as 21% year-on-year this quarter, significantly higher than the expected 15%. According to disclosures, Costco's online site traffic increased by 13% year-on-year, and the average spending per customer increased by 10% year-on-year. This also shows a clear upward trend in prices, although the increased proportion of gold and jewelry, which performed strongest in terms of categories, should also be a factor in the rise in average spending per customer.

Membership fee revenue this quarter was $1.19 billion, a year-on-year increase of 7.4%, with the growth rate declining by 0.4 percentage points compared to the previous quarter, falling short of the market expectation of 9.5%. The performance of membership revenue was poor. In terms of price and volume drivers, this quarter the number of paying members increased by 1 million quarter-on-quarter, a year-on-year growth of 6.8%. The net increase in the number of paying members quarter-on-quarter or year-on-year is at a recent lowThe average membership fee per member is $60.9 (annualized), a year-on-year increase of 0.5%, with little change in per capita payment. This is mainly due to the lower-than-expected growth in new paying users leading to membership revenue growth falling short of expectations.

5. In terms of financial metrics, Costco achieved total revenue of $63.7 billion this quarter, a year-on-year increase of 9%. From the perspective of gross profit, the gross margin for merchandise sales this quarter was 10.9%, a slight increase of 0.05 percentage points year-on-year, which is a narrowing compared to the 0.23 percentage point increase in the previous quarter.

According to the company's explanation, the increase in gross margin is mainly attributed to a 0.05 percentage point improvement in the gross margin of core merchandise retail, while other influencing factors largely offset each other. Overall, the gross profit amount was $7.98 billion, a year-on-year increase of 9.3%, which is roughly in line with the revenue growth rate, representing a fairly standard performance.

On the expense side, Costco's total selling and administrative expenses this quarter were $5.85 billion, a year-on-year increase of 8.1%, slightly lower than the revenue growth rate, resulting in an expense ratio that narrowed by 0.08 percentage points compared to the same period last year, to 9.06%. According to the company, this expense contraction is mainly due to a 0.07 percentage point reduction in the rate of core operations, while new store expenses accounted for a 0.01 percentage point increase.

The operating profit margin is still in a phase of steady growth, with actual operating profit of $2.32 billion, a year-on-year increase of 12.3%, which is quite good, but the consensus expectation from sell-side analysts was higher at $2.33 billion.

However, in terms of net profit, the net profit this quarter was $1.79 billion, a year-on-year increase of only 2.6%, which is 2.7% lower than the expected $1.84 billion. This was the main point of missing market expectations this quarter. It also seems to reflect the issue of increasing revenue without increasing profit. According to the company, this is mainly due to a one-time tax benefit of about $0.94 billion in the same period last year. Excluding this impact, net profit increased by 8.4% year-on-year, which is roughly in line with the revenue growth rate. Overall, it is still a good performance.

Dolphin Research Perspective:

As per the company's previous practices, Costco, as the absolute leader in warehouse discount retail, has the advantage of stability in its performance and a strong ability to grow across economic cycles. Overall, looking at this earnings report, excluding the impact of taxes, both the revenue growth and profit side still delivered a solid performance with a year-on-year growth of 8% to 9%. Based on past performance, there are still no issues to point out with Costco.

Broadening the perspective, from the company's performance in relation to the overall U.S. economy, especially the trends in middle-class consumption, the quantity aspect appears to be stable with an upward trend. From the price perspective, there seems to be a turning point indicating signs of inflation again. This has reference significance for the future trends of U.S. Treasury yields.

From a forward-looking perspective, Costco itself does not provide performance guidance, but recent earnings reports from peers like Walmart are not optimistic for 2025. It is also necessary to pay attention to whether re-inflation will have a reflexive suppressive effect on consumption (higher prices may temporarily benefit consumption growth but could suppress residents' willingness to consume in the future)The following is a detailed commentary:

Strong retail sales growth, but does it hint at inflation in the U.S.?

1. The U.S. leads strong growth, is consumer inflation returning?

In terms of core operating metrics, this quarter, Costco's overall same-store sales growth across all regions was 6.8%, significantly accelerating compared to the previous quarter and exceeding the sell-side expectation by 0.4 percentage points. After excluding the impact of oil price fluctuations and exchange rates, the overall same-store comparable growth rate reached as high as 9.1%, an increase of 2 percentage points compared to the previous quarter. The growth can be described as strong; however, the company's monthly disclosures for December and January show that the growth excluding oil prices and exchange rates was over 9%, so the market should have relatively sufficient expectations for this strong growth.

In terms of price and volume drivers, the overall 6.8% sales growth can be broken down into a 5.7% increase in same-store traffic and a 1% increase in same-store average spending per customer. In terms of trends, both traffic and average spending per customer have increased compared to the previous quarter, and the increase is not small. It is worth noting that this quarter marks the first time since the beginning of fiscal year 2023 that the year-on-year increase in average spending per customer has reached over 1%.

2. Is U.S. consumption rising again? International consumption, on the other hand, is declining.

By region, same-store sales in the U.S./Canada/other international regions grew by 8.3%/4.6%/1.7% respectively. It can be seen that the strong growth this quarter was mainly driven by the U.S. region, with a quarter-on-quarter increase of 3.1 percentage points.

In contrast, same-store growth in Canada and other international regions has slowed quarter-on-quarter, mainly due to exchange rate factors. After excluding the impact of exchange rates and oil and gas prices, same-store growth in Canada and international regions also reached 10%.

Similarly, when broken down by price and volume, it can be seen that this quarter, the same-store average spending per customer in the U.S. region increased by 2.6% year-on-year, marking the first time since the last inflation and interest rate hike cycle (fiscal year 2022-2023) that there has been an increase of over 1% in average spending per customer. This seems to hint at a resurgence of consumer inflation pressure.

3. E-commerce continues to grow rapidly, with significant contributions from both price and volume.

As a new growth driver in the post-pandemic era, Costco's e-commerce sales this quarter grew by as much as 21% year-on-year, a significant increase compared to the previous quarter and notably higher than the expected 15%. It was disclosed that Costco's online site traffic increased by 13% year-on-year, and average spending per customer increased by 10% year-on-year. This also shows a clear upward trend in prices, but it should not only be attributed to inflation; the increase in the proportion of categories performing strongest, such as gold and jewelry, should also contribute

Due to strong growth in North America and e-commerce sales, this quarter Costco's total confirmed merchandise sales revenue was approximately $62.5 billion, a year-on-year increase of 9.1%, which was better than the market expectation of a 7.9% growth.

2. New user growth hits a new low, dragging down membership fee revenue below expectations

The membership fee revenue this season was $1.19 billion, a year-on-year increase of 7.4%, with a growth rate down 0.4 percentage points from the previous season, lower than the market expectation of 9.5%. The performance of membership revenue was poor. Driven by price and volume, this quarter the number of paying members increased by 1 million quarter-on-quarter, a year-on-year growth of 6.8%. Both the quarter-on-quarter net increase and year-on-year growth are recent lows.

The average payment price per member was $60.9 (annualized), a year-on-year increase of 0.5%, with little change in per capita payment price. The main reason is that the low growth of new paying users led to revenue growth falling short of expectations.

It may be influenced by the price increase in September and Costco's recent crackdown on account sharing, as well as strengthened verification of membership status. However, although new additions have declined, the renewal rate of existing users continued to improve this quarter. The renewal rate in North America increased by 0.2 percentage points to 93%, and the global renewal rate also rose by 0.1 percentage points to 90.5%. However, this also indicates that the renewal rate in non-North American regions has decreased quarter-on-quarter.

3. Taxes are the main reason for the net profit falling short of expectations

In terms of financial indicators, Costco achieved total revenue of $63.7 billion this season, a year-on-year increase of 9%. Although membership fee revenue was slightly below expectations, it accounts for a small proportion of total revenue, while merchandise growth, which constitutes the bulk, was strong, thus total revenue growth still exceeded expectations.

From the perspective of gross profit, the gross profit margin for merchandise sales this quarter was 10.9%, a slight increase of 0.05 percentage points year-on-year, which is a narrowing compared to the 0.23 percentage points increase from the previous quarter. According to the company's explanation, the rise in gross profit is mainly attributed to a 0.05 percentage point increase in the gross profit of core merchandise retail, while other merchandise sales (such as fuel and pharmaceutical sales) increased by 0.01 percentage points, but were dragged down by the cost handling rule LIFO, which affected the gross profit margin by 0.01 percentage points. Overall, the gross profit amount was 7.98 billion, a year-on-year increase of 9.3%, which is roughly in line with the revenue growth rate, representing a fairly standard performance.

On the expense side, Costco's total sales and management expenses this quarter were 5.85 billion, a year-on-year increase of 8.1%, slightly lower than the revenue growth rate, resulting in an expense ratio that narrowed by 0.08 percentage points compared to the same period last year, to 9.06%. According to the company, the reduction in expenses was mainly due to a 0.07 percentage point saving in the core operations, while new store expenses accounted for a 0.01 percentage point increase.

The operating profit margin is still in a phase of steady growth, with an actual operating profit of $2.32 billion, a year-on-year increase of 12.3%, which is quite good, but the consensus expectation from sellers was higher at $2.33 billion.

However, in terms of net profit, the net profit this quarter was $1.79 billion, a year-on-year increase of only 2.6%, which is 2.7% lower than the expected $1.84 billion. This was the main point that missed market expectations this quarter. It seems to reflect the issue of increasing revenue without increasing profit. However, according to the company, this was mainly due to a one-time tax benefit of about $0.94 billion in the same period last year. Excluding this impact, the net profit increased by 8.4% year-on-year, which is roughly in line with the revenue growth rate.