Costco Wholesale (COST) just reported fiscal third-quarter results that beat Wall Street’s revenue expectations, but the story behind the numbers is even more compelling. Record fuel volumes attracted first-time gasoline customers, pharmacy sales increased due to demand for the drug GLP-1, and digital traffic increased 37%. With membership renewal rates stabilizing and fee refunds to members on the way back, the long-term thesis for COST stock remains firmly intact.
What should investors expect from Costco in the future? Let’s take a closer look.
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Costco Posted Strong Third Quarter Numbers
According to its recent earnings report, Costco posted third-quarter net sales of $69.15 billion, up 11.6% from the same period last year. Total revenue, including membership dues, came to $70.5 billion, beating the Wall Street consensus estimate of $69.81 billion. Meanwhile, earnings per share were in line with expectations at $4.93, with net profit for the period at $2.19 billion. That was up from $1.9 billion, or $4.28 per share, in the year-ago quarter.
Adjusted comparable sales, excluding gas price inflation and currency swings, grew 6.6% during the quarter. It’s a stable, healthy number that shows Costco’s core business is growing steadily, even before accounting for the fuel tailwind.
Membership fee revenue grew 10.7% year-over-year (YOY) to $1.37 billion. The company ended the quarter with a total of 82.9 million paid members, a 4.1% year-over-year increase. More specifically, executive memberships, Costco’s top-tier option that tends to generate members who spend more and visit more often, grew 9.6% to 41.2 million.
Gas business is a key driver for Costco
Costco posted record fuel volumes during the fiscal third quarter as conflict in the Middle East continued to drive up oil prices and consumers sought relief at the pump. CEO Ron Vachris told analysts that the last five weeks of the quarter were the five highest volume weeks in the company’s history. Each of the quarter’s three four-week fiscal periods “set successive all-time company sales volume records.”
Costco attracted first-time gas customers during the period: people who had been members but had never used the gas stations before. In particular, members who fill up at Costco tend to spend more in-store and renew their memberships at higher rates. In short, cheap gasoline is a key traffic factor and a driver of loyalty.
Vachris added that Costco has widened its price gap from its competitors at the pump and has been deliberate about maintaining stock even as demand has increased. He noted that the gas team was managing multiple daily fuel deliveries to many locations just to keep up.
Fees, refunds and what members can expect
Costco has been at the center of a high-profile tariff dispute. Following a U.S. Supreme Court decision that invalidated certain taxes tied to President Donald Trump’s import tariff program, the company had previously pledged to return savings to members if refunds were issued.
Vachris confirmed that Costco has begun filing refund claims through U.S. Customs and Border Protection. Based on the experience of other claimants, the company expects to begin receiving approved refunds on a rolling basis within a few months of filing.
The plan is to return the funds to members in some form, although the timing and amount will depend on actual refund receipts and the outcome of ongoing litigation related to the refund process. “Our goal is to be the first to lower prices and the last to raise them,” Vachris said.
That phrase captures what makes Costco’s model so durable. The department store giant already reduced prices last quarter on several Kirkland Signature items, including a reduction on Kirkland Signature Crispy Wings from $16.99 to $14.99 and king-size sheets from $89.99 to $79.99, according to CFO Gary Millerchip.
Digital growth and the AI opportunity
Costco’s digital business increased comparable sales 21.5% in the quarter, and site and app traffic increased 37% year over year. Personalized product recommendation features generated conversion rates three times higher than standard benchmarks and contributed just under $5 billion in e-commerce sales during the period.
Management also noted an emerging opportunity in the pursuit of artificial intelligence (AI). Big language models are increasingly guiding shoppers toward the best value for a given product, and Costco believes it will benefit. Accordingly, the company has been updating its online product pages to ensure its value proposition is clearly displayed in AI-powered search results. While AI-generated traffic to Costco’s website still represents a small portion of overall visits, it grew by triple digits in the quarter and has the highest conversion rate of any traffic source.
Finally, same-day delivery (now available in the US, Spain and France through third-party partners) averaged less than 45 minutes in the US with a healthy customer satisfaction rate.
Is Costco Stock Undervalued?
Valued with a market capitalization of $426.7 billion, Costco shares are down 12% from their all-time high. However, COST stock has also returned more than 500% to shareholders over the last decade.
Of the 34 analysts covering Costco stock, 19 recommend a “Strong Buy” rating, three recommend a “Moderate Buy,” 11 analysts recommend a “Hold” rating, and one recommends a “Strong Sell” rating. The average price target of $1,099.37 represents a potential upside of 13% from current levels.
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On the date of publication, Aditya Raghunath had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
