Will 2026 Mark a Turnaround for Costco?

Costco is navigating tariff headwinds (it is suing the U.S. administration seeking refunds) while leaning on Kirkland Signature expansion and merchant adjustments to mitigate inflationary impacts. FY2025 highlights include Q4 revenue of $86.16 billion (+8.1% YOY), net income of $2.61 billion (+11% YOY), paid memberships of 81 million (+6.3% YOY), e-commerce sales of $19.6 billion (+15% YOY) and digitally enabled sales above $27 billion; the company opened 27 warehouses (total 914) with 35 planned for FY2026. Analysts (32 coverages) give a consensus Moderate Buy with a $1,027.75 12-month target (~11.5% upside), EPS is forecast to rise ~9.21% to $19.69 next year, institutional ownership is ~68.5% and short interest is low (1.63%), supporting a constructive, though not market-moving, investment case.

Analysis

Market structure: Tariff pressure and Costco’s Kirkland expansion reallocate margin and share toward membership-led, private‑label operators (COST, WMT) and away from national‑brand dependent retailers (TGT). Costco’s 90%+ renewal rate and $13.3B operating cash imply higher pricing power and stable demand; e‑commerce growth to $19.6B supports share gains in omnichannel grocery. Commodities and FX: tariffs raise input costs for apparel/consumer goods, pressuring margins for import‑heavy chains and modestly lifting consumer staples CPI passthrough; investment‑grade retail credit spreads should tighten as cash flows strengthen.

Risk assessment: Tail risks include an adverse legal outcome or tariff re‑escalation that raises costs and forces markdowns (low probability, high impact), and a macro downturn that drops renewal rates from ~90% to ~85% which would pressure FY26 EPS >5%. Immediate volatility will orbit court headlines (days–weeks); medium term (3–12 months) depends on new warehouse openings (35 planned) and membership growth; long term (1–3 years) EPS should track historical ~11% CAGR unless tariffs persist. Hidden dependencies: Kirkland scale relies on concentrated supplier contracts and inventory investment that could amplify supply shocks.

Trade implications: Favor overweight COST and selective WMT for defensive growth; underweight TGT and import‑exposed specialty retailers. Specific option strategy: sell short‑dated covered calls on existing COST positions to monetize low IV, and consider 9–12 month 5–10% OTM call spreads (financing via selling nearer OTM puts) to capture analyst upside to ~$1,028. Pair trade: long COST vs short TGT to isolate secular membership moat versus merchandising missteps. Time entries on pullbacks: accumulate COST under $930 and scale in up to 4% portfolio weight; trim if COST rises 15% or memberships decelerate to <2% QoQ.

Contrarian angles: The market underprices a potential one‑time tariff refund (could be hundreds of millions) which would be EPS accretive and is not baked into consensus; low short interest (1.63%) suggests complacency and limited hedge demand. Reaction may be underdone on durable e‑commerce and private‑label momentum but overdone on near‑term tariff headlines; historical parallel: Costco post‑2008 showed durability through membership-led cash flow recovery. Unintended risks: rapid Kirkland expansion could provoke supplier retaliation or capex/inventory strain; watch supplier concentration metrics and SG&A cadence.

Key Decisions for Investors

• Establish a 2–3% long position in COST (ticker COST) now, add another 1–2% if price falls below $880; target sell or re‑assess at $1,030 (12 months) or if FY2026 paid memberships growth slows to <3% YoY; use a 10% stop‑loss.
• Initiate a pair trade: long COST (2%) vs short TGT (1.5%) to capture relative moat; size short smaller to limit idiosyncratic retail risk; close the pair if COST outperforms TGT by >20% or if TGT guides margin improvement.
• Implement options: sell 30–60 day covered calls on existing COST holdings to harvest premium given low IV; concurrently buy a 9–12 month 5–10% OTM call spread (finance with selling a deeper OTM put) to retain upside to analyst PT ~$1,028.
• Add a 1–2% tactical long in WMT for defensive exposure to tariff pass‑through and scale benefits; increase only if same‑store sales and e‑commerce growth exceed +4% YoY over a quarter.
• Monitor legal catalysts: track U.S. Court of International Trade and Federal Circuit rulings over the next 3–6 months and company disclosure of estimated refund magnitude; if refund signal >$300M, rotate 50% of short retail exposure into COST/WMT within two weeks of filing.