This Holding Is Selling Off After Earnings but Our Price Target Remains Intact

Costco COST delivered mixed February quarter results with total revenue that rose 9% year over year to $63.72 billion, topping the $63.1 billion consensus, but EPS of $4.02 came up short by $0.07.

EPS was negatively impacted by foreign exchange during the quarter by $57 million or $0.13 per share. It’s that less-than-2% EPS miss relative to market expectations that is leading COST shares to trade off on Friday morning despite February and February comps sales data that shows Costco is taking not only consumer wallet share but doing so from Walmart WMT, Target TGT and others.

Modest near-term margin headwinds will see us keep our COST target at $1,100 for now but should upcoming monthly comp sales data continue to show Costco taking consumer wallet share, we will revisit that target as needed. We suspect that is likely as consumers contend with sticky inflation and prospects for more as President Trump continues with tariffs.

On Thursday, we shared that if COST shares drift back to the 50-day moving average near $988, that would be a nice pickup point, but a more compelling one would be closer to $960. Such a move would mean COST shares pulling back to January levels, something that has a low probability so long as the company continues to post enviable adjusted monthly comp sales figures.

For the quarter, Costco’s adjusted total comp sales rose 9.1% with the U.S. up 8.6%, but its e-commerce business climbed more than 22% compared to year-ago levels. As we suspected, the company is seeing faster growth in fresh and related food categories, which tells us it also beating Kroger KR, which posted 2.4% identical sales growth for its latest quarter. Alongside its quarterly results, Costco also published its February comp sales, which on an adjusted basis climbed 8.3% overall with the U.S. up 8.6%. Other International dipped in February due to the impact of currency but also the timing of Chinese New Year.

Running through the usual quarterly metrics, Costco ended the February quarter with 78.4 million paid household members, up 6.8% versus last year, and 140.6 million card holders, up 6.6% year over year. At quarter end, it had 36.9 million paid Executive Memberships, up 9.1% versus last year, and those members now represent 47.1% of paid members and 73.8% of worldwide sales. During the earnings call, management shared that it is targeting growth for that membership class, especially in markets outside the U.S. We can understand why that is, given the membership price point difference between the Executive Membership fee of $130 per year compared to $65 for Gold Star and Business.

On the topic of membership fee revenue, it rose 7.5% year over year to $1.193 billion with the recent membership fee increase contributing approximately 3% in the quarter. Due to the effects of deferred accounting, the majority of the benefit from the membership fee increase will come over the next four fiscal quarters with the largest impact in the August 2025 and November 2025 quarters. In the meantime, Costco targets opening 15 new warehouse locations this year — three in Canada and the balance in international markets.

The long-term plan remains to open 25 to 30 new warehouses a year with just over half in the U.S., and the balance in international markets, including Canada, Mexico, Asia and Europe. As we see that should translate into a steady increase in the high-margin membership fee revenue stream, which accounts for half of the company’s operating and pre-tax net income.

As you know, we tend to focus on margins quite a bit and the Costco management team was upfront in sharing that the company will see some near-term headwinds from its updated employee agreement that went into effect this week. However, that should be offset later this year as the full effect of its 2024 membership fee income is felt. Further progress on the company’s advertising business should also help offset the impact of that new employee agreement.

While the impact of tariffs remains murky, Costco’s focus on providing high-quality items at great prices to its growing membership remains a recipe for ongoing success. As consumers feel the incremental pinch of inflation and tariffs, we continue to see Costco winning consumer wallet share. To that end, management shared it is working with suppliers and it has also been buying more inventory to mitigate tariff-related pressure near-term.

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At the time of publication, TheStreet Pro Portfolio was long COST.