Costco beats earnings: a retail stock opportunity?

Moomoo Insights

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COST Q2 Earnings Preview: Will Its 54x P/E Premium Hold Up?

$Costco (COST.US)$ will report FY2026 Q2 earnings after the bell on March 5 (alongside February sales data). Market expectations remain optimistic, with consensus estimates calling for Q2 revenue of $69.28B and EPS of $4.536 per share.

After hitting all-time highs, shares of the warehouse retail giant experienced a pullback amid softer consumer data. Fortunately, recent rotation out of tech stocks has helped the stock find its footing, driving a roughly 17% year-to-date rebound.

Yet market anxiety persists. Costco currently trades at a 54x P/E multiple—not only far exceeding the industry average of ~18.9x, but also surpassing most high-growth tech stocks. The market has fully priced in its "reliability premium." This earnings report isn't about proving "whether it can grow"—monthly sales data has already provided that reassurance. Rather, it's about demonstrating whether the quality of growth justifies this "expensive vote of confidence."

What will truly drive valuation volatility are: comparable store performance, membership fee sustainability, and whether gross margin/expense ratios can continue delivering operational leverage.

Why Costco May Actually Benefit from Weak Consumer Spending

When consumer sentiment weakens and price sensitivity rises, retail winners are determined not by "brand appeal" but by "value proposition." Costco's advantages are structural:

– Low-markup operating philosophy: Product margins are razor-thin, with membership fees providing more stable profits—making it naturally attractive to value-seeking consumers during economic pressure.

– Membership moat: Membership fees aren't one-time transactions but subscription-like recurring cash flows that inherently filter for high-frequency customers.

– Kirkland's substitution effect: When consumers opt for "quality alternatives" over premium brands, Costco typically benefits most—a key reason funds have positioned it as a defensive play recently.

Simply put: "weak consumption" is a macro narrative, and Costco is one of the most certain winners within that narrative.

Q2 Revenue Likely "Won't Disappoint"—Market Focused on Profitability & Membership

Costco's latest January sales report showed net sales for the four weeks ended February 1, 2026, increased 9.3% year-over-year to $21.33B. This growth was driven by strong comparable sales across all regions and significant e-commerce contributions. Comparable sales increased 7.1% overall, with U.S. up 5.8%, Canada up 11.4%, and other international markets up 9.5%.

This means: the probability of revenue "collapsing" is minimal. Therefore, market attention will naturally shift upward—from "is there growth" to "what's the quality of that growth."

It's crucial to emphasize: current market expectations for Costco are elevated. "Meeting targets" may not suffice. True catalysts for valuation expansion typically come from two types of surprises:

1. Stronger-than-expected membership revenue and renewal rates

2. Evidence of operational leverage through margin/expense ratio improvements

Critical Focus Areas for Q2 Earnings

Membership Metrics: Is Growth Sustainable?

For Costco, membership is essentially the "anchor" of its valuation. This quarter, focus on three key items:

– Renewal rate stability: Can North American renewal rates hold above 92%+, with global rates maintaining ~90%?

– Membership mix risk: Management has noted that younger members registering online show lower renewal rates—will this continue to drag on overall renewals? This is the market's most sensitive marginal variable.

– Executive membership penetration: Higher penetration of premium Executive members directly strengthens membership fee predictability while boosting purchase frequency and basket size.

Notably, after Costco raised membership fees and tightened food court access in September 2024, traffic has actually strengthened—suggesting that "raising the entry barrier" is functioning as a loyalty filter rather than a traffic deterrent.

Traffic & Comps: Growth Driven by "More People" or "Higher Prices"?

The market will use this report to verify: is traffic stabilizing and recovering, or is growth still primarily driven by pricing factors/category mix?

When dissecting same-store sales (SSS), watch two elements:

– Core comps (excluding gas prices and FX): This best reflects underlying operating health.

– Regional balance: Can the U.S. remain stable while Canada and international markets sustain high growth? Regional composition affects both margin profiles and future growth sustainability.

In other words, comp growth doesn't fear being slow—it fears degrading quality.

E-commerce: Can High Growth Become "Normalized"?

E-commerce is increasingly resembling Costco's "second engine":

– On one hand, it's a critical entry point for attracting younger members

– On the other, it can offset physical store volatility when traffic slows

For Q2, verify not "whether e-commerce is growing," but: is the high growth rate sustainable, and is it driving better customer stickiness and membership growth? If e-commerce growth significantly decelerates, the market will reassess Costco's growth ceiling.

Kirkland: The "Hidden Ace" in an Inflationary Era

Under inflation and budget-tightening narratives, Kirkland's value proposition becomes even more pronounced:

It binds "affordability" with "quality," allowing consumers to trade down without sacrificing experience. As long as the "seeking alternatives" trend persists, Kirkland will continue strengthening Costco's market share logic and membership stickiness.

Gross Margin & Expense Ratios: The Real "Watershed" This Earnings

Against a high-valuation backdrop, marginal changes in profit structure get amplified in pricing. Key focus areas:

– Can gross margin maintain or modestly improve (influenced by category mix, promotional intensity, and shrinkage)?

– Is SG&A ratio continuing to decline (are scale effects still diluting costs)?

– Are labor and new store ramp-up costs controllable?

– Are technology investments beginning to drive efficiency gains (supply chain, inventory, pharmacy, etc.)?

The market doesn't require Costco to become a "high-margin company," but it does demand proof that: as growth scales up, profits aren't being consumed by costs.

External Variable to Watch: Walmart's Warning

Last month, $Walmart (WMT.US)$ issued weaker-than-expected full-year guidance, citing uncertainties around trade dynamics and labor market conditions, sending shares down post-earnings. Costco faces similar pressures—if management characterizes tariffs, freight costs, and FX as "uncontrollable," valuations typically sell off first and ask questions later.

Additionally, as one of the original plaintiffs in the tariff lawsuit against the U.S. government, Costco prevailed and may receive between $500M to $2B in tax refund cash flow. While management may not address this near-term, confirmation would represent significant upside.

Options Market Signals

From an options perspective, COST pricing ahead of earnings (March 5) has clearly become "event-driven": current total open interest stands at ~212.4K contracts with a Put/Call Ratio of 0.90—not showing extreme defensive tilt, but rather a structure that's slightly bullish yet protected. Capital is positioned for upside exposure while hedges are building (rising near-term Put/Call typically signals elevated pre-earnings protection demand).

More noteworthy is the volatility setup: Implied Volatility at 29.55% significantly exceeds Historical Volatility of 22.09%, with IV Percentile at 83% (elevated), indicating the market is paying a premium for "gap risk/volatility expansion" ahead of the print. The classic signal here is potential for IV crush post-earnings (volatility collapse)—meaning directional trades that don't capture sufficient magnitude risk getting hurt by "time decay + volatility collapse."

A more suitable approach may be using spreads/hedged structures to express views, or waiting for the event to pass before trend-following.

Bottom Line

Costco's business model is a retail benchmark—membership economics' cash flow resilience, Kirkland's brand moat, and scale-driven pricing advantages position it to capture more share during weak consumption cycles.

However, the current 53x P/E implies market expectations for "flawless execution" are fully priced in. Any miss on core metrics could trigger valuation correction.

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