Costco Earnings Show A Consumer Increasingly Under Stress

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Good morning!

I know we all love AI for summarizing, but every now and then I encourage all investors to read a full earnings call transcript to get all the juicy tidbits. I did that with Costco on Friday, and it was the most insightful report I’ve read in a while, second to my favorite economic report, The Beige Book. 

Costco is my favorite retailer, and before you wonder, yes, there’s a Costco in NYC that I frequent. I think its warehouse club business model is incredible, and I strongly believe that Costco is a hallmark of American capitalism. In fact, I’ve even had conversations with some of our readers about how much we love Costco’s nonfat Greek yogurt. 

As such, Costco COST is of ultra importance when gauging consumer spending, which is the biggest driver of economic growth. Costco is the world’s third largest retailer after Amazon and Walmart, and according to a New York Times story from 2024, nearly one-third of U.S. consumers shopped at Costco. 

After quarterly earnings beat expectations Thursday after close, its stock rose 2.9% on Friday, outperforming the broader S&P 500’s 0.5% advance. Global traffic increased 3.3%, while membership revenue rose 7.3% to $1.85 billion, with the growth rate slowing down for the third straight quarter. Paid members, meanwhile, edged up 3.8% to 84.1 million from a year ago, the lowest increase since the third quarter of 2017. Renewal rates grew slightly to 92.3%, meaning that at least those who shop at Costco kept coming back. 

So it’s little wonder that the stock is still lagging behind the index on a year-to-date basis, up a modest 8% compared to 13% for the S&P 500. 

Here’s what stood out to me from the earnings call:

#1 Younger consumers are flocking to Costco. Executives said that the member base under 40 has grown nearly 60% since Covid-19, representing over a quarter of the total base. “While these younger members start out spending a little less with us, over time they grow into higher spending members,” execs said. They said that as the younger members get to 40 to 55, which is when they see members hit peak spending patterns, they’d be able to enjoy Costco’s myriad of offerings even more. That maturity curve is bullish for the stock. 

#2 Consumers love filling up the tank at Costco, with the gas business posting a record year. In the fiscal year 2026, the penetration of U.S. member households that purchased gas reached an all-time high, according to execs. At the same time, spending on travel is strong, too, signaling that consumers are looking to save where they can, i.e. necessities like gas, but they won’t shy away from splurging on vacation packages, cruises, and car rentals. One member, in fact, booked a 154-night cruise on Regent Seven Seas at a cost of over $218,000. Costco’s average customer tends to be higher income, so to me this means that some of the higher income consumers are trending down in this K-shaped economy, while those at the very top are still doing well. Gas and travel, along with pharmacy, rose faster than the overall business growth rate for fiscal year 2026. “Our members continue to show resilience in their spending and they show a willingness to spend in discretionary areas where they’re seeing exciting new items of great value,” execs said. 

#3 Execs are keeping an eye on the surge in gas, diesel, and other distillates. The fuel surcharges have so far been offset by lower contracted shipping rates. Like I said last week, the volatility seen in fuel prices is just one component of what goes into determining shipping and transportation costs via the fuel surcharge, so prices would have to stay high for a while to see another wave of inflation. Costco’s size also allows it an incredible amount of negotiating power with vendors, which is again bullish for the stock. 

#4 Inflation is not a burden so far, remaining in the low single digits in the last quarter. Most of it was concentrated in consumer electronics, due to higher memory and storage prices, along with gas, motor oil, and petroleum-based items. Inflation in the meat category was offset by deflation in eggs and dairy. Costco also received about one-third of the total tariff refunds expected, which it has reinvested in its value proposition. “Quite a few everyday items were impacted. We did also invest some dollars into a number of non-food areas where tariffs would have had an impact on those items in particular when the IEEPA tariffs were originally introduced,” execs said. 

The overall takeaway remains that there’s a growing divide between different income groups of consumers. Of course, Costco is not immune from a spending slowdown when the higher-income consumer acts like a lower-income one, but if there’s any retailer that can thrive in that K-shaped economy, it’s Costco. 

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📧✍️Here’s what a reader commented📧✍️

Q: Are you worried about what’s going on with bonds

A: I’m not worried as much as I might have been in past years. Supply and demand are the ultimate arbiters of all monetary events. What today appears to me is another exogenous factor that the market is simply digesting. It’s interesting to see market participants (FS Direct et al.) actively shaping public policy (aka Fed policy) by better understanding macro mechanics than the so-called experts. This is probably the greatest time in human history to be a witness as digitization takes hold to an unimaginable extent.

Catch up with Fundstrat

Our analysis shows that long-term yields and bond volatility only started surging after Fed Chair’s speech at Jackson Hole. That was when he surprised markets with a very hawkish message. And since then, yields have surged. This makes me wonder if this argues for the idea of a policy error.

Technical

While a bit of work remains for US indices to push through to new highs, I like being long for rallies into mid-to-late October and would utilize any and all pullbacks as an attractive risk/reward opportunity, not something which leads to meaningful weakness.

Crypto

Hyperliquid has been the clearest example of a protocol pairing strong fundamentals with tokenholder-conscious capital allocation, and the market has rewarded that structure. With the regulatory path becoming clearer, I would expect more projects to move in this direction, potentially supporting higher-quality token economics and some degree of multiple expansion for profitable protocols.

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