Costco (COST) stock dropped sharply on Friday, sliding over 6% as investors reacted to the wholesale giant’s fiscal second-quarter earnings.
The company reported adjusted earnings per share (EPS) of $4.02, missing Bloomberg’s consensus estimate of $4.11. Revenue, however, slightly exceeded expectations at $63.72 billion, compared to projections of $63.01 billion.
Despite a 6.8% increase in overall same-store sales, Costco fell short in Canada and other international markets. Excluding fuel and foreign exchange impacts, same-store sales rose by an impressive 9.1%. However, the earnings miss and macroeconomic uncertainty led to a sell-off, erasing some of Costco’s year-to-date gains. Even with Friday’s decline, the stock remains up over 5% for the year, outpacing the S&P 500’s 2.4% drop.
Margins Under Pressure as Inflation Persists
Rising costs weighed on Costco’s margins, particularly in fresh food categories such as meat and bakery. CFO Gary Millerchip noted that inflation in eggs, cocoa, coffee, cheese, and corn drove up costs, partially offset by deflation in sugar, butter, and flour. Merchandise gross margins came in at 10.85%, slightly below Wall Street’s expectations.
Membership fees, a key driver of Costco’s profitability, climbed 7.4% year-over-year to $1.19 billion but fell short of analysts' projections of $1.22 billion. While membership growth remains strong, the company acknowledged that inflationary pressures could impact consumer spending behavior going forward.
Tariff Concerns Add to Uncertainty
Investors are also wary of the potential impact of tariffs on Costco’s supply chain. CEO Ron Vachris stated that while the company has “relatively low exposure” to tariffs, it remains prepared to adjust its sourcing strategies if necessary. About one-third of Costco’s U.S. sales come from imports, with less than half of those goods originating from China, Mexico, and Canada—three countries recently targeted by new U.S. tariffs.
Despite near-term headwinds, analysts remain optimistic about Costco’s long-term growth prospects. Bank of America (BAC) reiterated its ‘Buy’ rating, citing the company’s strong value proposition in an inflationary environment. However, with shares trading near record highs before the earnings report, investors may have set expectations too high, leading to Friday’s sharp pullback.
Despite a 6.8% increase in overall same-store sales, Costco fell short in Canada and other international markets. Excluding fuel and foreign exchange impacts, same-store sales rose by an impressive 9.1%. However, the earnings miss and macroeconomic uncertainty led to a sell-off, erasing some of Costco’s year-to-date gains. Even with Friday’s decline, the stock remains up over 5% for the year, outpacing the S&P 500’s 2.4% drop.
Margins Under Pressure as Inflation Persists
Rising costs weighed on Costco’s margins, particularly in fresh food categories such as meat and bakery. CFO Gary Millerchip noted that inflation in eggs, cocoa, coffee, cheese, and corn drove up costs, partially offset by deflation in sugar, butter, and flour. Merchandise gross margins came in at 10.85%, slightly below Wall Street’s expectations.
Membership fees, a key driver of Costco’s profitability, climbed 7.4% year-over-year to $1.19 billion but fell short of analysts' projections of $1.22 billion. While membership growth remains strong, the company acknowledged that inflationary pressures could impact consumer spending behavior going forward.
Tariff Concerns Add to Uncertainty
Investors are also wary of the potential impact of tariffs on Costco’s supply chain. CEO Ron Vachris stated that while the company has “relatively low exposure” to tariffs, it remains prepared to adjust its sourcing strategies if necessary. About one-third of Costco’s U.S. sales come from imports, with less than half of those goods originating from China, Mexico, and Canada—three countries recently targeted by new U.S. tariffs.
Despite near-term headwinds, analysts remain optimistic about Costco’s long-term growth prospects. Bank of America (BAC) reiterated its ‘Buy’ rating, citing the company’s strong value proposition in an inflationary environment. However, with shares trading near record highs before the earnings report, investors may have set expectations too high, leading to Friday’s sharp pullback.
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