Costco Earnings Beat Expectations. Why the Stock Is Dropping.

Costco stock is up 3% this year. (FREDERIC J. BROWN/AFP via Getty Images)

Key Points

• Costco exceeds earnings and revenue forecasts, reporting adjusted earnings of $5.87 per share and revenue of $86.2 billion.
• Same-store sales increase by 5.7%, falling short of the 5.9% forecast and the 6.9% increase from the prior year.
• Membership income grows by 14%, and e-commerce same-store sales rise by 13.6%, driven by categories like gold and apparel.

Shares of Costco Wholesale were falling Friday even as earnings and revenue in the fiscal fourth quarter at the warehouse club chain topped expectations. Blame lower-than-expected growth in same-store sales.

Costco declined 2.8% to $917.18 while the benchmark S&P 500 rose slightly. Through Thursday’s close, shares had risen just 3% this year, underperforming the S&P 500’s increase of nearly 13% and the SPDR S&P Retail ETF’s 8% gain.

The stock move appeared to reflect investor ambivalence about the retailer’s latest quarter. Costco reported adjusted earnings of $5.87 a share for the quarter ended Aug. 31, ahead of analysts’ consensus estimate of $5.80 a share. Revenue of $86.2 billion was a hair better than projections for $86 billion.

Same-store sales, however, increased 5.7% from last year but were short of forecasts for a 5.9% increase. Same-store sales measure sales growth at stores open for more than a year, and they are an important indicator of a retailer’s organic growth.

While a 5.7% increase in itself is nothing to scoff at— Walmart’s U.S. same-store sales grew by 4.6% in its latest quarter—the figure is well below the 6.9% increase notched in the year-ago quarter. Plus, it is the second consecutive quarter in which Costco’s same-store sales have missed the mark.

Created with Highcharts 9.0.1Costco WholesaleSource: FactSetAs of Sept. 25

Created with Highcharts 9.0.12025Sept.8759009259509751,0001,0251,0501,075$1,100

The stock’s lofty valuation means that investors won’t be forgiving when evaluating the company’s quarterly performance.

Costco stock currently trades hands at 47 times next year’s earnings. While that is below the all-time highs reached earlier this year, it’s still elevated compared with the stock’s historical average and the rest of the retail sector.

Investors have been happy to pay a premium for Costco—the company is one of the steadiest performers in the retail space and has been gaining market share at a clip in the past couple of years. Few analysts see that changing soon, but many are beginning to question how sustainable the high valuation multiples are barring any unexpected catalysts, such as a stock split or a special dividend.

That said, there was a lot to like about Costco’s fourth quarter.

The company’s membership income grew by 14% from last year. A little under half of that increase stemmed from last year’s membership fee increase, executives said.

E-commerce also did well, with online same-store sales rising 13.6% year over year. Gold, jewelry, housewares, and apparel were some of the top online categories, with sales growing by double-digit percentages. The company has been improving its online shopping experience for several quarters. Recent enhancements include improving the search experience, instituting an online waiting room for highly anticipated product releases, and being able to access the Costco app without a password.

Costco’s recent store-hour changes also helped boost sales. Since late June, Costco has allowed its Executive members, who pay double the standard annual fee, to shop an hour before opening time in a bid to lower congestion. The extra hour has encouraged some members to shift their trips to earlier in the day, reducing traffic in late-morning and afternoon peaks, according to a report from Placer.ai.

The policy also added about 1% to weekly U.S. sales since its implementation, said CEO Ron Vachris on a call with investors Thursday. Encouragingly, the changes to store hours had minimal impacts to operating costs, executives said, noting that store operators had minimized impacts to the selling, general, and administrative expenses. Perks like these have also encouraged more customers to upgrade their membership to the Executive membership tier.

“Membership trends and consumer behavior across various income segments magnified the company’s value-focused positioning during a period of economic uncertainty,” said Bryan Hayes, strategist at Zacks Investment Research. “As the labor market continues to show signs of faltering, consumers have pulled back on dining and related expenses in favor of cheaper options, helping discount retailers like Costco stand tall.”

Indeed, Costco plans to keep growing its presence worldwide. The company opened 27 new warehouses throughout the fiscal year ended in August, and plans to open another 35 stores in fiscal 2026.

Warehouse club stores in general have been growing in popularity with the public since the pandemic, a trend that a number of experts expect will continue as tariffs contribute to ongoing inflation for essential goods. Data from Placer.ai show consistent foot traffic in recent years.

Costco and peers are also benefitting from an increase in shoppers buying online, allowing them to get the benefits of membership without committing time to big stock-up trips that have traditionally been a knock against the category.

Write to Sabrina Escobar at sabrina.escobar@barrons.com