Is Costco a Buy After Its Latest Earnings Report? – The Motley Fool

Rising fuel prices and the Iran war may be pushing more shoppers to Costco Wholesale (COST 0.83%), which reported better-than-expected revenue and earnings for the fiscal third quarter on May 28.
Costco said the company saw "record-breaking" gas volumes near the end of the quarter as fuel prices climbed. The national average for gas is $4.42, up 25 cents per gallon in just a month and up from $3.16 a year ago, according to the American Automobile Association (AAA).
That bodes well for Costco in the long term — particularly if gas prices remain elevated even after hostilities in the Middle East wane. But does it change the narrative for Costco stock this year?
Discount retailers and warehouse stores are generally good retail bets when people are worried about the economy. And there's plenty to be concerned about right now, when you also factor in higher prices from tariffs, inflation that remains high, and a slowing labor market. Costco uses the power of bulk purchasing and no-frills warehouses to offer lower prices to customers.
Costco sells everything from bulk groceries to household goods, electronics, and some apparel. And it also sells gasoline — which was a hot seller in the quarter as its members look to stretch their dollars.
"The high consumer price sensitivity, which fueled these record volumes, also drove many members to use our gas stations for the very first time in the third quarter," CEO Ron Vachris told analysts in the company's earnings call. "We believe this will drive even greater loyalty with these members in the future, as members who use our gas stations typically spend more with us in the warehouse."
And that loyalty could have long-term effects, said Gary Millerchip, the company's chief financial officer. "They are spending more with us overall, and they are also renewing at a higher rate. So we do think it is a good, healthy barometer of long-term growth for the business as we continue to drive engagement in gas," he said.
Overall, Costco reported revenue of $70.52 billion for the fiscal third quarter (ending May 10), up 11.5% from a year ago. Net income was $2.19 billion, up 15% on a year-over-year basis, and earnings per share of $4.93 was up from $4.29. Analysts had been expecting revenue of $69.81 billion.
Management said paid memberships grew 4.1% for the quarter. I love the membership model because it provides another source of income and encourages repeat customers — after all, if you're going to pay for a membership, you should use it, right? For the quarter, Costco made $1.37 billion in membership fees, up 10.7% from a year ago.
Costco also saw solid gains in digital — its website and app traffic were up 37% from last year, and personalized e-commerce recommendation tools showed conversion rates that were three times higher than site averages, resulting in nearly $5 billion in e-commerce sales during the quarter.
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Costco stock is up 15% so far this year, even as U.S. grocery store sales have remained roughly flat. The forward price-to-earnings ratio of 48.5 is elevated, even greater than its most direct competitor, Walmart, which has a forward P/E of nearly 41.

COST data by YCharts
Costco will continue to generate revenue and traffic even in challenging economic times, but the same factors driving traffic are also hurting its profitability. Costco acknowledged that its gross margin fell from 11.25% a year ago to 11.04% this quarter, due to reduced margins on some fresh food items, such as beef and eggs, and higher transportation costs.
Overall, Costco remains an expensive stock to own, with few near-term options to increase margins. While it has applied to the Trump administration for tariff refunds and hopes to see approved claims over the next few months, the company has no plans to bolster its bottom line; instead, it will lower its prices. "Our goal is to be the first to lower prices and the last to raise them," Vachris said.
Costco had a solid quarter, but the stock barely moved in after-hours trading, as investors didn't see much to get excited about in its earnings report. I'll continue to sit on the sidelines and look for better opportunities than Costco stock.
Patrick Sanders has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.
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Costco had big revenue numbers, but its profit margin compressed.

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