Costco Beat on Earnings. About $0.15 a Share of It Was a One-Time Tariff Refund.

Costco reported fiscal Q4 EPS of $6.75 and revenue of $95.7 billion, both above consensus, but EPS included a non-recurring $0.15-per-share benefit from $184 million in tariff refunds. Excluding the refund, EPS was $6.60, up about 12% year over year, while adjusted comparable sales rose 6.7% and worldwide traffic increased 3.3%. Membership-fee income growth slowed to 7.3% from 14% in fiscal Q1 as the benefit from the 2024 fee hike rolled off, raising concerns over growth durability at a roughly 43x earnings valuation.

Analysis

The important earnings-reset mechanism is not the refund itself but the loss of fee-increase lapping: membership income is Costco's highest-margin revenue stream, so its normalization toward organic growth reduces the operating-income growth algorithm even if traffic remains healthy. Reinvesting subsequent tariff recoveries into price reinforces Costco's value proposition and may support renewal/traffic, but it converts a legally contingent windfall into lower realized merchandise margin rather than durable EPS. That makes consensus estimates vulnerable over the next two quarters if they continue to extrapolate recent double-digit bottom-line growth.

COST's premium multiple leaves little room for a transition from fee-led earnings acceleration to sales-led growth, particularly when underlying gross-margin expansion appears modest. The near-term downside catalyst is not weak demand; it is a clean first-quarter comparison that exposes lower membership-fee contribution and removes refund-assisted margin. Conversely, accelerating traffic is a meaningful defense against a fundamental short: it can sustain comp growth, preserve vendor leverage, and delay multiple compression if management shows renewed margin expansion.

The relative opportunity is COST versus BJ's Wholesale (BJ) and Walmart (WMT). BJ has greater earnings sensitivity to membership penetration and can benefit if Costco's price reinvestment forces broader club-channel price competition, but its lower valuation provides a more favorable risk/reward on the long side; WMT's ad, marketplace, and fulfillment income create margin drivers less dependent on membership-fee cadence. The contrarian view is that a modest deceleration is already reflected after the drawdown, and Costco's recurring refund batches could support pricing and traffic for several quarters—so express bearishness with defined risk rather than an outright large short.

Key Decisions for Investors

• Initiate a 1-3 month relative-value position: long BJ / short COST, sized beta-neutral. Thesis is multiple compression in COST as organic membership growth becomes visible versus BJ's lower starting valuation; reassess if COST reports adjusted membership-fee growth above 8% and merchandise-margin expansion above 20 bps without tariff recoveries.
• For defined-risk bearish exposure, buy COST Dec-2026 $850/$750 put spreads after any post-results relief rally toward $930-$950. The trade targets a valuation reset into the next clean quarterly print; risk is limited to premium, while the thesis is invalidated by a return to mid-teens adjusted EPS growth or a material upward revision to FY2027 guidance.
• Do not add to outright COST longs before the next membership-renewal and margin disclosure. Use adjusted fee-income growth, excluding price and FX effects, as the key watch metric; sustained 6-7% growth supports a quality hold but is insufficient on its own to underwrite further multiple expansion.
• Monitor WMT as the defensive retail alternative rather than a direct COST short hedge. A widening COST/WMT valuation premium without evidence of superior adjusted operating-income growth would strengthen the rotation case over the next 6-12 months.