Costco Stock: Can the Momentum Continue?

Costco reported strong fiscal third-quarter results, with revenue up 8% to $63.21 billion and adjusted EPS increasing 13% to $4.28, exceeding analyst expectations. Same-store sales rose 8%, driven by strength in the U.S. and Canada, and e-commerce revenue increased 15.7%; membership fee revenue also climbed 10.4% to $1.24 billion. Despite tariff concerns and a high forward P/E ratio of 57.5, Costco continues to outperform competitors, though analysts note that new store openings may cannibalize existing sales and that the stock's valuation may be difficult to justify.

Analysis

Costco Wholesale (NASDAQ: COST) demonstrated robust financial health in its fiscal third quarter, with quarterly revenue increasing 8% year-over-year to $63.21 billion and adjusted earnings per share (EPS) rising 13% to $4.28, surpassing LSEG analyst consensus estimates of $63.19 billion in revenue and $4.24 EPS. This performance was underpinned by strong same-store sales, which grew 8% globally on an adjusted basis, with U.S. adjusted same-store sales up 7.9% and Canadian adjusted comparable sales up 7.8%. E-commerce revenue also showed significant growth, increasing 15.7% on an adjusted basis. Key operational metrics support this strength, including a 5.2% worldwide increase in customer traffic (5.5% in the U.S.) and a 2.7% rise in average transaction value globally (2.3% in the U.S.), excluding gasoline and currency effects. Membership fee revenue climbed 10.4% to $1.24 billion, driven by a previous fee hike and a 6.8% increase in paid households to 79.6 million, with high-value executive memberships growing 9% to 37.6 million and accounting for 73% of worldwide sales. Despite these strong figures and proactive measures to mitigate tariff impacts—such as local sourcing and rerouting products—and initiatives to enhance customer experience like technology investments and a new "buy now, pay later" program, concerns persist regarding the stock's valuation. The forward price-to-earnings (P/E) ratio stands at a high 57.5. While Costco continues to outperform competitors like Target (comparable sales down 3.8%) and Walmart (U.S. same-store sales up 4.5%), the company's new store expansion (eight in Q3, nine planned for Q4) at a rate of less than 3% annually, coupled with potential sales cannibalization from new stores aimed at alleviating congestion, suggests a mature business concept that may struggle to justify its elevated multiple against low-teens revenue growth. Membership renewal rates, while high at 92.7% in North America and 90.2% worldwide, saw a slight dip attributed to lower renewal rates from younger consumers signing up digitally.

Key Decisions for Investors

• Acknowledge Costco's strong operational execution and consistent market share gains, which signal continued business strength, yet exercise caution due to the stock's significantly elevated forward P/E ratio of 57.5, which may cap near-term upside.
• Monitor the impact of new store openings on overall sales growth and profitability, specifically watching for the balance between alleviating congestion and sales cannibalization, as well as the sustainability of membership growth and renewal rates, particularly among digitally acquired younger members.