Costco Shows Resilience Amid Trump's Tariff Moves

The king of global discount retail—$Costco Wholesale(COST.US) released its Q3 FY2025 earnings report after the U.S. market close on May 30, Beijing time. As usual, Costco's performance this quarter remained steady without much fluctuation. Key highlights:

1. Comparable store growth remains solid: Costco's total nominal comparable store sales growth for the quarter was 5.7%, slowing significantly by 1.1 percentage points compared to the previous quarter. However, this was mainly dragged down by oil prices and exchange rates. Excluding these factors, comparable store growth still reached 7.9%, which is not a bad performance.

In terms of price and volume drivers, comparable store traffic grew by 5.2% this quarter, with only a slight slowdown. However, dragged down by exchange rates and other factors, the average transaction size growth rate dropped significantly to 0.4% year-over-year, which was the main reason for the weaker nominal comparable store sales growth.

2. Overseas growth is also decent: By region, comparable store sales in the U.S./Canada/other international regions grew by 6.6%/2.9%/3.2%. At first glance, the nominal growth rates in Canada and other international regions lagged significantly behind the U.S., with only low single-digit growth, appearing very weak.

However, this was also due to the impact of oil prices and exchange rates. Excluding these factors, comparable store sales growth in Canada and other international regions was around 8%, basically in line with the U.S. This shows that Costco's operational performance is quite stable globally.

3. Membership fee revenue: This quarter, it was $1.24 billion, slightly below expectations by $10 million. However, the year-over-year growth of 10.4% was the highest since Q4 2023. The trend is positive, but not as strong as the market expected.

The increase in revenue growth was mainly driven by the average annualized membership fee per member of $62.3, up 3.3% year-over-year. This was partly due to the crackdown on account sharing and stricter verification of membership status. However, for similar reasons, membership renewal rates in North America and globally declined by 0.3 percentage points quarter-over-quarter, resulting in growth not being as strong as expected.

4. Gross margin improved against the trend: Combining the above businesses, Costco's total revenue this quarter was $63.2 billion, up 8% year-over-year, showing steady performance. Since the company discloses sales data monthly, there was no significant surprise in revenue. Gross profit and expenses were the main sources of potential surprises in the earnings report.

Specifically, the gross margin for merchandise sales improved significantly by 41 basis points year-over-year, resulting in merchandise gross profit of $6.97 billion, $230 million above expectations, a strong performance.

The early purchases of high-priced durable goods mentioned earlier were likely one of the main contributors to the gross margin improvement.

5. Expense ratio also expanded—is there real reflation pressure? Costco's total SG&A expenses this quarter were $5.68 billion, slightly above the market expectation of $5.58 billion. The expense ratio was 9.16% of revenue, up 20 basis points year-over-year. The expansion in labor and other operating expenses suggests that inflationary pressures may not be unfounded.

Overall, however, because the improvement in gross margin outpaced the expansion in expenses, the company's operating profit this quarter was $2.53 billion, up 15.2% year-over-year, significantly outperforming revenue growth and market expectations.

6. On the net profit level, due to slightly higher-than-expected tax expenses and lower interest income, net profit grew by 13% year-over-year, with the growth rate narrowing and only meeting expectations.

Dolphin Research's view:

As in the past, Costco, as the absolute king of warehouse discount retail, excels in its extremely strong stability and ability to grow through economic cycles. Under the pressure of Trump's tariffs, weakening economic expectations, and reflation in commodity prices, Costco still delivered solid revenue and profit growth in this earnings report.

Excluding the impact of exchange rates and oil prices, Costco's comparable store sales growth in all regions remained in the high single digits, seemingly unaffected by the three "macro headwinds," once again validating the loyalty of its customers and the naturally more resilient spending power of its middle-class and above customer base.

However, the expansion in merchandise costs and operating expenses does indicate that, under the impact of tariffs, the company's procurement costs and store operating expenses are indeed increasing. The pressure of reflation is not just talk, and this has prevented the company's profit growth from significantly outpacing revenue growth. But thanks to its deep supply chain expertise, the company has demonstrated its ability to pass on costs to consumers and upstream suppliers.

Overall, despite various macro headwinds, Costco's ability to weather cycles has once again been validated. From a valuation perspective, with revenue and profit growth around 10%, the P/E ratio ranges from 30x at the low end to 60x–70x at the high end, making it difficult to judge whether the valuation is attractive. More importantly, if the investment goal is to seek risk and cycle resistance, with stable rather than exceptionally high returns, then Costco is a good choice.

Detailed analysis:

1. Unfazed by tariffs and inflation concerns, Costco remains stable

1. Comparable store growth of 5.7%—still good

The core operating metric, Costco's total comparable store sales growth this quarter was 5.7%, slowing significantly by 1.1 percentage points compared to the previous quarter. While growth appears to have slowed under the impact of inflation and tariffs, excluding the drag from oil prices and exchange rates, comparable store growth was still 7.9%, slowing only slightly by 0.7 percentage points quarter-over-quarter, which is not a bad performance. The actual performance met market expectations.

In terms of price and volume factors, it can also be seen that comparable store traffic growth, unaffected by exchange rates and oil prices, was 5.2% this quarter, with a relatively modest slowdown. The drag on nominal growth was more evident in the average transaction size growth rate, which dropped from 1% last quarter to 0.4% this quarter.

2. Excluding the drag from oil prices and exchange rates, overseas growth is also decent

By region, comparable store sales in the U.S./Canada/other international regions grew by 6.6%/2.9%/3.2%. It is clear that the nominal growth rates in Canada and other international regions lagged significantly behind the U.S., dragging down overall growth.

Similarly, the low single-digit growth in Canada and other international regions was mainly due to the drag from exchange rates and other factors. Excluding the impact of oil prices and exchange rates, other international regions actually had the highest comparable store sales growth at 8.5%, while Canada was basically in line with the U.S. Therefore, ignoring the noise from price fluctuations, Costco's operational performance is quite stable globally.

3. New growth driver—e-commerce continues to grow rapidly

As a new growth driver in the post-pandemic era, Costco's e-commerce sales grew by 14.8% year-over-year this quarter, slowing significantly quarter-over-quarter, but the absolute level is not low. According to the company, online traffic surged 20% year-over-year this quarter, but the average transaction size grew by only 3% year-over-year, dragging down sales growth.

By category, the company also reported strong sales in jewelry, toys, beauty, and furniture, with most being durable goods except beauty.

4. Overall, despite the impact of exchange rates and oil prices, Costco's global comparable store sales growth was still 5.7%, which is not low. Additionally, the company opened 8 new stores this quarter, equivalent to 3.4% year-over-year growth, marking a small peak in net store openings in recent quarters. Therefore, Costco's total merchandise sales revenue grew 8% year-over-year to nearly $62 billion, meeting market expectations.

2. Membership structure continues to upgrade, revenue accelerates but renewal rates decline

The membership fee revenue, which is small in absolute size but high in profit contribution, was $1.24 billion this quarter, slightly below expectations by $10 million. However, the year-over-year growth of 10.4% was the highest since Q4 2023. Overall, this quarter's membership fee revenue was marginally positive but not as strong as the market had hoped.

In terms of price and volume drivers, paid members increased by 1.2 million quarter-over-quarter this quarter, up 6.85% year-over-year, in line with recent trends. The average annualized membership fee per member was $62.3, up 3.3% year-over-year. It is clear that the average membership fee was the main driver of the acceleration in revenue growth this quarter.

We believe that Costco's crackdown on account sharing and stricter verification of membership status since the second half of last year have contributed to the strong membership fee growth in recent quarters. In terms of membership structure, the proportion of high-level Executive members increased from 46.3% last year to 47.2%, which was the main reason for the increase in the average membership fee.

However, perhaps due to the same crackdown and recent macro factors, member renewal rates declined significantly this quarter. Renewal rates in North America and globally both fell by 0.3 percentage points quarter-over-quarter. While such a decline is not unprecedented historically, it is indeed uncommon.

3. Both gross margin and expense ratio rise—is there real reflation pressure?

1. Financially, Costco's total revenue this quarter was $63.2 billion, up 8% year-over-year, showing steady performance. Since the company discloses sales data monthly, the market had full expectations for revenue, leaving little room for surprises.

2. Therefore, gross profit and expenses were the main sources of potential surprises in the earnings report. The gross margin for merchandise sales was 11.25% this quarter, up 41 basis points year-over-year, exceeding expectations. This resulted in merchandise gross profit of $6.97 billion, $230 million above expectations, outperforming expectations.

According to the company, the core retail business contributed 36 basis points to the year-over-year gross margin improvement, but this was partially offset by a 23-basis-point drag from the LIFO (last-in, first-out) cost accounting method.

Based on market reports and company disclosures, due to expectations of inflation and tariffs, consumers in Europe and the U.S. did engage in early purchases this quarter, particularly for higher-priced durable goods, which drove the gross margin improvement.

Because the company uses the LIFO method, the most recent procurement costs are reflected in the financials, dragging down the gross margin by 23 basis points. This shows that recent inflation and tariffs have indeed increased the company's procurement and operating costs.

3. On the expense side, Costco's total SG&A expenses this quarter were $5.68 billion, slightly above the market expectation of $5.58 billion. The expense ratio was 9.16% of revenue, up 20 basis points year-over-year, showing an expansion trend. According to the company, this was mainly due to a 13-basis-point increase in store operating expenses, indicating that labor and related costs are indeed rising under the impact of tariffs.

4. On the net profit level, due to slightly higher-than-expected tax expenses (this quarter: $680 million vs. expectation of $650 million) and lower interest income (this quarter: $85 million vs. the usual $100 million+), net profit grew by 13% year-over-year, with the growth rate narrowing and only meeting expectations.