Costco Wholesale Corporation (NASDAQ:COST, ETR:CTO) shares dropped on Friday morning after the warehouse retailer’s fiscal second quarter earnings fell short of expectations.
The company’s net income was $1.79 billion or $4.02 per share, short of expectations of $4.11 per share.
Revenue increased 9% year-over-year to $63.7 billion, beating estimates of $63.1 billion, as revenue from membership fees grew 7% from the year-ago quarter to $1.2 billion.
Comparable sales increased by 6.8%, ahead of the expected 6.4% growth.
During the company’s earnings call, Costco CFO Gary Millerchip said he expects consumers to remain “very choiceful” given the potential impact of tariffs.
Manageable risks
Analysts at UBS see the tariff risk as manageable for Costco, repeating their ‘Buy’ rating on the company post-earnings.
“The retailer noted that two-thirds of what it sells in the US is sourced domestically. Less than half of its imported product is from a combination of China, Mexico and Canada,” analysts noted.
They added that Costco is proactively managing the uncertainty from tariffs.
“It has the ability to swap out items, push back on vendors, change domiciles of sourcing, and pass along price increases,” they wrote.
“It might seek to absorb more of the cost increases than other retailers, at least temporarily. This is due in part to the growing profit benefit that it should see from its membership fee increase that accrues at an accelerating pace in the next couple of quarters.”
A notable takeaway from Costco’s report was its increase in membership by 6.8% to 78.4 million members, analysts highlighted.
“We think Costco is working to continue to attract members in new ways and increase the ways it gets new members. For example, it recently increased the percentage rebate it gives its Executive members for their spending on gasoline to 5% from 4%,” they noted.
The analysts have a $1,205 price target on Costco, which traded down 2.7% at $998.50 before Friday’s opening bell in New York.
“We think Costco is demonstrating that it's in a unique position,” the analysts concluded. “It is gaining copious amounts of market share in all sorts of consumer backdrops. We think that continues. Thus, the stock should remain a core holding, in our view.
Shares of Costco lost 7.2% in Friday morning trading.