Earnings Preview | The weaker the consumption, the busier the business? Costco(COST.US)Q2 earnings report may once again confirm its status as the "recession-resistant king"

Wesley Financial APP has learned that Costco Wholesale (COST.US) will release its Q2 earnings after the U.S. stock market closes on March 5th Eastern Time. The market generally expects the company’s Q2 revenue to be approximately $69 billion, with earnings per share of $4.50.

Costco: A Business Model Built for Tough Times

Since reaching its peak, this warehouse retail giant’s stock price has continued to decline over the past few months amid weakening consumer data. Fortunately, the recent trend of funds rotating out of tech stocks has helped halt the decline and pushed its stock price up about 17% since the beginning of the year.

In fact, an economic slowdown should be a positive factor for Costco, mainly because it is known for selling products at very low profit margins. Its food items, such as rotisserie chickens and the iconic hot dogs, are even sold as “loss leaders” below cost. This well-known characteristic allows Costco to capture more market share when consumers feel financially strained.

Currently, consumers are feeling the pressure from store prices, and overall sentiment is subdued. Inflation has remained above target for years, and core products like those sold by Costco have been the main drivers of rising inflation last year.

This has prompted consumers to make smarter shopping choices, such as increasing the variety and quantity of items purchased at Costco. This trend is supported by Costco’s membership data.

Data shows that from 2014 to 2021, when inflation was around 1.9%, Costco’s membership numbers grew at an average rate of about 5.5%. From 2022 to 2025, as inflation again became a hot topic with an annual consumer price index increase of about 4.4%, Costco’s membership growth accelerated to approximately 7%.

Additionally, Costco’s flagship private label—Kirkland Signature, known for “affordable quality”—has become a significant competitive advantage during this period of subdued consumer sentiment. Kirkland products are generally supplied by manufacturers that produce for major brands (e.g., Kirkland vodka by Grey Goose, Kirkland coffee by Starbucks), making them nearly indistinguishable outside the brand. This is well known among Costco shoppers and is a key reason for repeat purchases and higher customer spend. It’s one of the few affordable alternatives with consistent value, helping Costco build a large base of loyal customers.

“Weak consumer sentiment” is a macro narrative that cannot be ignored right now, and Costco is a clear beneficiary. As long as substitute products maintain high quality, consumers are willing to give up brand-name products.

Kirkland’s market positioning aligns perfectly with this logic. As long as this trend continues—especially given the Federal Reserve’s rate cuts amid still-high inflation—Costco is expected to continue benefiting from consumers fleeing traditional retailers and non-membership big-box stores in search of price buffers.

Q2 Performance Outlook

First, many market participants will be closely watching Costco’s comments on tariffs. Costco was among the plaintiffs suing the U.S. government, and the Supreme Court has ruled that tariffs under the International Emergency Economic Powers Act (IEEPA) were violated. Although the company may not mention refunds in the short term, since the Supreme Court has yet to issue a final ruling (the case has been remanded for reconsideration), any mention of refunds would be a significant positive for the company.

Since tariffs were imposed last year, Costco has paid substantial tariffs, as nearly one-third of its products are imported. A refund would be a welcome cash inflow for the market, estimated between $500 million and $2 billion, though investors are currently unsure of the exact amount Costco has paid under IEEPA tariffs.

Costco’s January sales were strong, with net sales around $21 billion, up 9.3% year-over-year; for the first 22 weeks of this fiscal year (nearly half a year), sales increased by 8.5% YoY. The growth is steady and aligns with market expectations.

However, there are several aspects to watch closely in the earnings report. If they fall short or fail to meet expectations, it could trigger market concern.

Market attention remains on membership growth. If the previously mentioned slowdown occurs, market sentiment could turn negative. The same applies to membership tier structure and renewal rates. Based on current trends, these figures are not expected to worsen, but given the consensus expectations, any lower-than-expected data could cause unexpected volatility.

Online sales growth is also highly anticipated. Costco’s online segment has maintained double-digit growth recently, and any slowdown could be a major negative catalyst.

Costco rarely provides forward guidance, so investors rely on Wall Street estimates. The market expects Costco to maintain its usual growth pace. As a steady-operating machine, as long as it delivers results in line with expectations, the market is likely to respond positively.

The only potential negative in the earnings call could be margin pressure. Costco’s gross margin is already low; if it cannot recover some margin after winning the tariff litigation, it could be difficult for the market to accept. Currently, the tariff situation remains uncertain, as new tariffs have been introduced to replace old measures.

Valuation Is High but Normalized

Compared to competitors, Costco’s valuation remains high. Its P/E ratio is very elevated, comparable to that of previously uncorrected tech software companies. Moreover, its operating profit margins are higher than most peers, which are often valued at lower forward P/E multiples.

This high valuation includes a significant amount of goodwill premium, as reputation remains crucial for consumers, especially in the current economic environment. The market also expects Costco to have growth capabilities that others lack, such as expanding into new markets; for example, BJ’s Wholesale Club (BJ.US) is limited to the U.S., while Costco has substantial overseas revenue.

A fitting description of Costco is a “certainty asset”—a company perceived to have certain inherent qualities, such as consistently performing well during economic downturns, as mentioned at the beginning of this article. If this “certainty” is broken—say, during a recession where Costco fails to attract consumers as expected—the valuation premium could be lost. Part of the current premium is undoubtedly priced in as “a recession hedge,” which is concerning because it depends on future outcomes beyond investors’ control.

Conclusion

Overall, sales data so far indicate strong growth momentum, and macroeconomic conditions are favorable, supporting the expectation that Costco will deliver a positive second quarter. Its accumulated goodwill also allows it to maintain valuation premiums when results meet expectations.

While not “perfectly priced,” the stock’s valuation implies “zero tolerance for error.” If trends reverse, market sentiment could quickly turn negative, wiping out all gains this year. With increasing frequency of large stock swings around earnings, investors should be cautious of significant risks if results fall short.

Any statements about tariff refunds or future tariff reductions are likely to trigger positive market reactions. However, Costco’s management has historically been conservative with forward guidance, and it is unlikely they will release much related information in the near term.