Costco’s Strong Quarter Still Leaves Investors With a Valuation Problem

Costco reported record fiscal Q3 2026 revenue of $70.53 billion, but EPS of $4.93 slightly missed the $4.98 consensus and shares fell 4% the next day. Headline same-store sales growth of 9.8% was reduced to 6.6% after adjusting for gas and currency, suggesting the quarter was solid but not strong enough to justify the stock's roughly 47x forward earnings multiple. Costco also raised its dividend 13% to $1.47 per share and expects to open 26 warehouses this fiscal year, but tariff refund uncertainty and fading technical momentum may keep the stock range-bound.

Analysis

The market is signaling that COST is no longer a fundamentals story so much as a duration/multiple story: when a defensive compounder trades at ~47x forward earnings, the bar shifts from "solid execution" to "visible acceleration." The key second-order issue is that fuel-driven traffic is a low-quality tailwind for perceived comp strength; if gasoline normalizes, headline sales growth can decelerate quickly even if unit demand remains healthy, which risks multiple compression before the next catalyst appears.

BJ has a more interesting setup than COST on a relative basis. If consumers are trading down into warehouse clubs, BJ can capture some of the same value-seeking behavior at a lower starting valuation, so the incremental downside from a Costco disappointment may be smaller there than the market assumes. The competitive effect is not that BJ wins outright on brand, but that it can absorb marginal share from price-sensitive households if traffic becomes more promotion- and fuel-sensitive over the next 1-2 quarters.

The tariff refund angle is a real catalyst, but it is timing-optional and legally noisy, which makes it a poor basis for paying peak multiples today. The more important risk is that a clean refund headline arrives after the stock has already derated, meaning upside gets partially monetized by the market before actual cash flow shows up. Conversely, if gas rolls over and comps re-rate toward the adjusted 6-7% range, the stock can stay range-bound for months even with intact long-term fundamentals.

The contrarian read: this was not a bad quarter, it was merely a quarter that failed to justify a premium already priced for perfection. That matters because a richly valued defensive name can underperform in both risk-off and risk-on tapes if growth decelerates even modestly. The setup favors relative-value and optionality trades over outright directional longs until either valuation resets or a genuinely clean catalyst emerges.

Key Decisions for Investors

• Short COST vs long XLP or long BJ on a 1-3 month horizon: express the view that COST's multiple is more vulnerable to normalization in comps than BJ's lower multiple; target 5-8% relative downside if valuation de-rates toward a more typical premium.
• Sell COST call spreads 4-8 weeks out on strength into any tariff-refund headlines: the catalyst is real but timing is uncertain, so implied upside may be overpaid relative to actual realized cash flow.
• Do not chase COST on pullbacks until the stock reclaims and holds the post-earnings gap area for at least 2-3 weeks; absent that, the setup is consolidation-to-mean-reversion rather than trend continuation.
• Add BJ on weakness as a relative beneficiary of value-trading behavior, but keep size modest: the bull case is share capture at a lower starting multiple, not a dramatic re-rating.
• If COST breaks below the recent range low and RSI remains sub-50 for another 2 weeks, consider a tactical short targeting a move toward the 200-day average; risk is a sharp rebound on any approved tariff refund or stronger-than-expected gas-driven traffic.