Costco (COST) "Core-on-Core" Margin Expansion To Justify Premium Valuation

$Costco(COST)$'s upcoming Fiscal Q1 2026 earnings release scheduled for Thursday, December 11, 2025 (After Market Close).

Consensus EPS Forecast: ~$4.25 (vs. $3.82 in Q1 2025).

Revenue Forecast: ~$67.1 Billion.

Implied Move: Options markets are pricing in a move of approximately ±4% post-earnings.

The "Open Secret" Factor: Unlike most companies, Costco releases monthly sales data. We already know that Net Sales for Q1 came in at $65.98 Billion (+8.2%) and November sales specifically were up 8.1%. Because the "top line" surprise is largely removed, the stock's reaction will depend almost entirely on margins (EPS) and forward guidance.

Summary: Costco (COST) Fiscal Q4 2025 Earnings

Report Date: September 25, 2025

The Headline: A "Good Enough" Beat That Wasn't Good Enough for the Market.

Costco delivered a solid quarter that beat expectations on both the top and bottom lines, yet the stock sold off immediately following the report. This classic "sell the news" event highlights the burden of high expectations.

1. The Key Numbers

Revenue: $86.16 Billion (+8.1% YoY). Beat estimates of ~$86.08B.

Note: Net Sales were $84.43B, while Membership Fees contributed a hefty $1.72B.

EPS (Earnings Per Share): $5.87 (vs. $5.29 in Q4 2024). Beat estimates of ~$5.80.

Comparable Sales (Same-Store Sales):

Global: +5.7% (Solid, but not explosive).

E-Commerce: +13.6% (A standout metric, showing digital acceleration).

Membership Fees: $1.72 Billion (+14% YoY).

Context: This surge was aided by the fee hike (effective Sept 2024) and strong sign-ups, though the global renewal rate dipped slightly to 89.8% (from 90%+), largely due to an influx of newer, less "sticky" digital members.

2. Important Commentary & Guidance

The "Wage vs. Inflation" Battle: Management noted that average hourly wages in the U.S. have crossed $31/hour. While this secures labor stability, it keeps SG&A (selling, general, and administrative) expenses elevated.

Gasoline Deflation: Lower gas prices were a headwind to headline revenue growth (dragging it down by ~0.9%), though this typically aids gross margins slightly.

Supply Chain & Tariffs: Management explicitly mentioned the return of inflation in "non-food" categories (e.g., electronics, hardware), driven partly by import costs. They signaled they are actively adjusting supply chains to mitigate potential future tariff impacts.

Expansion Plans: Confirmed plans to open 35 new warehouses in Fiscal 2026, signaling aggressive physical expansion.

The Lesson Learned from Q4 Guidance

"Perfection is the Minimum Standard at 50x P/E"

The primary lesson for investors from the Q4 report was about valuation risk, not business risk.

1. The "Priced for Perfection" Trap

The Reality: Costco traded at a P/E of ~50-55x heading into earnings—a valuation typically reserved for high-growth tech stocks, not low-margin retailers.

The Lesson: When a stock is this expensive, a "beat" is treated as "meeting expectations," and any slight blemish (like the minor dip in global renewal rates or gas deflation) becomes an excuse to take profits. The stock fell ~2-3% post-earnings because the guidance didn't promise accelerating growth to justify the premium multiple.

2. Margins Matter More Than Revenue

The Reality: Revenue growth is easy to see in monthly reports. The earnings call revealed that despite higher sales, gross margins are under pressure from higher wages and the need to keep prices low to fend off competitors (the "value moat").

The Lesson: In an inflationary/tariff-heavy environment, Costco chooses to absorb costs (hurting short-term margin) to keep customers loyal (long-term gain). Investors looking for short-term profit spikes will often be disappointed by this strategy.

3. Digital is the New Battleground

The Reality: The +13.6% growth in e-commerce was the brightest spot.

The Lesson: The guidance made it clear that Costco is finally successfully monetizing "big ticket" items online (gold bars, appliances). Future "beats" will likely come from this segment, as physical store growth is mathematically capped by geography.

Key Metrics to Watch

Since the revenue number is largely "de-risked" by the monthly reports, investors should focus intently on profitability and efficiency metrics:

1. Core Merchandise Margins vs. Gas Deflation

The Dynamic: Gasoline prices often skew Costco's headline numbers. Lower gas prices (deflation) hurt total revenue but typically improve gross margin percentages (as gas is lower margin than core retail).

What to Watch: Look for the "Core on Core" gross margin (excluding gas and foreign exchange). If this expands, it validates that Costco is managing inflation/supply chain costs effectively without passing too much pain to customers.

2. E-Commerce Growth (The New Star)

Recent Trend: Recent data indicates Q1 e-commerce sales surged +20.5%. This is a significant acceleration compared to previous years.

Why it Matters: High-ticket items (appliances, electronics, gold bars) often drive e-commerce. Strong growth here suggests consumer confidence among Costco's affluent base remains intact despite broader economic wobbles.

Costco Wholesale Corporation (COST) and $Wal-Mart(WMT)$ both closed out strong quarters in last reporting, revealing two very different strategies for winning in retail. Costco leaned into its membership warehouse model with e-commerce expansion. Walmart went all-in on omnichannel transformation and marketplace growth.

3. Membership Fee Income & Renewal Rates

Context: The membership fee hike (effective Sept 2024) is now fully rolling through the P&L.

What to Watch: Total membership fee income should be slightly above $1.1 Billion. More importantly, listen for the Renewal Rate. It has historically hovered around 93% (US/Canada). Any tick down here would be a major red flag that the fee hike or economic pressure is causing churn (unlikely, but high risk).

4. "Stocking Stuffer" Guidance (Holiday Outlook)

Timeline: With Thanksgiving falling late in 2025 (Nov 27), the "official" holiday shopping window is shorter.

What to Watch: Management's commentary on December trends. Are members "front-loading" purchases? Any weakness in discretionary categories (toys, jewelry) vs. staples?

Costco (COST) Price Target

Based on 31 analysts from Tiger Brokers app offering 12 month price targets for Costco in the last 3 months. The average price target is $1,050.20 with a high forecast of $1,218.00 and a low forecast of $627.21. The average price target represents a 18.21% change from the last price of $888.44.

Trading Analysis & Opportunities

Current Sentiment: The stock is currently in a technical downtrend (approx. 15-20% off its 52-week highs of ~$1080), trading around the $870-$900 level. This "correction" creates a more attractive entry point than previous quarters where COST was "priced for perfection."

Scenario A: The "Relief Rally" (Bullish)

Logic: Since sales were strong (+8.2%) and the stock has sold off recently, the bar for a positive reaction is lower. If EPS simply meets expectations ($4.25) and margins are stable, the stock could bounce off oversold levels.

Strategy: Bull Call Spread (Debit Spread).

Target: Buy the ATM (At-The-Money) Call and sell a higher strike Call (e.g., +$40 higher) for Jan 2026 expiration. This limits capital outlay while capturing a bounce back toward $950.

Scenario B: The "Margin Squeeze" (Bearish)

Logic: If the strong sales growth came at the expense of margins (e.g., deep discounting to move inventory), EPS could miss. Given Costco's high P/E ratio (~45x), any EPS miss is usually punished severely.

Strategy: Bear Put Spread or Iron Condor.

Iron Condor: If you believe the "known revenue" limits the surprise, you might sell volatility (betting the stock stays within a range). However, given the recent downtrend, directional protection is safer.

Short-Term "Fade" Trade

Costco rarely sustains massive pops (+10%) post-earnings because its valuation is always stretched. If the stock gaps up significantly (e.g., to $950+), day traders often look to fade the move (short intraday) as profit-taking sets in.

Technical Analysis - Exponential Moving Average (EMA)

We are seeing Costco trading in a decline with negative RSI momentum, this is despite market expectation for a strong core margins, but the question whether Costco can maintain margins despite gas deflation might be the reason for the decline, and concerns over Costco valuation risk, not business risk remain a concern.

As we can see that Costco is trading below the short-term EMA, and Costco does not have the history of sustaining massive pops (+10%) post-earnings because its valuation is always stretched. Even if it happens, we could see profit-taking sets in.

Summary

Costco’s Q1 report scheduled for December 11, 2025, is a "margins story." With sales data largely pre-released (Nov sales +8.1%), the revenue surprise is off the table. The stock, currently trading 15-20% below highs (~$870-$900), faces a lower bar than previous quarters, setting up a potential relief rally if profitability holds.

Consensus Estimates:

• EPS: ~$4.25 (vs. $3.82 YoY).

• Revenue: ~$67.1 Billion.

• Implied Move: ~4%.

Key Metrics to Watch:

1. Core Margins: Can Costco maintain margins despite gas deflation? Look for "Core-on-Core" margin expansion to justify the premium valuation.

2. E-Commerce: Recent data suggests a +20% surge. Continued strength here proves Costco is winning the "big ticket" digital battle.

3. Renewal Rates: Must hold at ~93%. Any dip due to the Sept 2024 fee hike is a major risk.

4. Holiday Guidance: Commentary on December "stocking stuffer" trends will dictate the immediate stock reaction.

Trading Strategy:

• Bull Case: If EPS meets targets and margins are stable, the recent sell-off offers a buying opportunity. Consider a Bull Call Spread (Jan 2026 expiry) to capture a bounce toward $950 with defined risk.

• Bear Case: If margins compress, the stock’s high P/E (45x+) leaves no room for error. A breakdown below $870 signals further downside.

Appreciate if you could share your thoughts in the comment section whether you think COST could provide a strong “core-on-core” margin expansion to justify its premium valuation.

@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire @MillionaireTiger appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.