Why Costco Stock Dropped After Earnings

Costco Wholesale (NASDAQ: COST) reported fiscal 2025 results, including $270 billion in net sales and 10% EPS growth, but saw its stock dip 3% due to investor concerns. Q4 comparable sales growth of 5.7% was lower than anticipated and largely attributed to new memberships, while overall membership renewal rates slightly declined to 90%. Given the stock's valuation at over 50 times earnings—near its historical peak—analysts suggest that modest growth, especially with infrequent membership fee increases, combined with this high valuation, could lead to underperformance relative to the broader market.

Analysis

Costco Wholesale's fiscal 2025 results, which included record net sales of $270 billion and a 10% increase in full-year EPS, were met with a 3% stock decline, signaling investor apprehension. The primary concern stems from a deceleration in key growth metrics. Fourth-quarter comparable sales grew 5.7%, a figure below expectations and largely attributable to a 6.3% year-over-year increase in new paid memberships to 81 million, implying stagnant spending from the existing customer base. Compounding this is a slight deterioration in the membership renewal rate, which slipped to 90%, with management noting weaker retention among newer members acquired online. These operational headwinds are magnified by the stock's demanding valuation, which trades at over 50 times earnings—a level near its historical peak and approximately double the S&P 500's multiple. While fiscal 2025 EPS growth was robust, it was significantly aided by a membership fee increase, an infrequent event that casts doubt on the sustainability of a double-digit growth rate required to justify its premium valuation.

Key Decisions for Investors

• Investors should be cautious of the stock's high valuation, as the P/E ratio of over 50x requires a level of earnings growth that may be difficult to achieve given the observed slowdown in comparable sales.
• It is critical to monitor upcoming quarterly reports for any further decline in membership renewal rates from the current 90% level, as this is a primary driver of profitability and a leading indicator of customer loyalty.
• Given the risk of valuation compression and potential market underperformance, current holders may consider trimming positions, while prospective investors should weigh the risk of initiating a position at these elevated multiples.