Costco's (NASDAQ: COST) stock dropped 6% on March 7 after the company posted its latest earnings report. In the second quarter of fiscal 2025, which ended on Feb. 16, the warehouse retailer's revenue rose 9% year over year to $63.72 billion and exceeded analysts' estimates by $640 million. Its adjusted comparable store sales also grew 9%.
Its net income rose 3% to $1.79 billion, or $4.02 per share, but it missed the consensus forecast by $0.09. That earnings miss, which it mainly blamed on higher merchandise costs, clearly rattled its investors. However, I think this pullback represents a compelling buying opportunity in the evergreen retailer, for five simple reasons.
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1. Its comps are rising in a tough macro environment
Costco's adjusted comps, which exclude its fuel sales and fluctuating foreign exchange rates, rose 10.6% in fiscal 2022, 5.2% in fiscal 2023, and 5.9% in fiscal 2024. In the first half of fiscal 2025, its adjusted comps rose another 8.1%.
That robust growth indicates that Costco is still well insulated from inflation, which generally drives consumers to make more bulk purchases to save money. During the conference call, CFO Gary Millerchip said inflation had been "relatively flat" for Costco "up until this quarter," when its overall inflation ticked up by the "low single digits." It attributed most of that pressure to its meat, bakery, and other fresh-food categories.
Those inflationary headwinds could persist over the next few quarters, and the Trump administration's unpredictable tariffs could prolong that pressure. Nevertheless, Costco's resilient business model has withstood several inflationary spikes since its IPO in 1985 -- and it should continue to resist that pressure and grow faster than many of its industry peers.
2. It's still gaining new cardholders
Costco can afford to sell its products at a low margin because it generates most of its profit from its high-margin membership subscriptions. Last September, it raised those fees for the first time in seven years.
But in the second quarter, its total number of cardholders still rose 6.6% year over year to 140.6 million. That ongoing expansion indicates that Costco is retaining its pricing power in this challenging market. As a result, its gross margin expanded five basis points year over year to 10.85% during the quarter, as its operating margin rose 10 basis points to 3.63%.
So while inflation had a greater-than-expected impact on its costs, it largely offset that pressure by gaining more cardholders. During the call, Millerchip said the company felt "good about the overall margin" and its "ability to keep investing in the member."
3. Its renewal rates are holding steady
Costco is also retaining its existing members. In the second quarter, its worldwide renewal rate stayed flat year over year at 90.5%, while its renewal rate in the U.S. and Canada, where 81% of its warehouses are located, rose 10 basis points to 93%.
Those healthy renewal rates indicate that its memberships are sticky, and they should keep its shoppers away from smaller competitors, including Walmart's Sam's Club and BJ's Wholesale Club. Its rising renewal rates in the U.S. and Canada could also give it a firm foundation for its ongoing overseas expansion.
4. It's still opening new warehouses
Over the past few decades, many struggling retailers shrank their brick-and-mortar footprints as their comps and margins declined. Yet Costco has consistently opened new warehouses since its public debut four decades ago.
Its number of year-end warehouses rose from 838 in fiscal 2022 to 890 in fiscal 2024, even as inflation and high interest rates curbed the expansion plans of many of its retail peers. Its number of warehouses rose to 897 at the end of the second quarter of 2025. Those consistent openings indicate that Costco isn't too worried about the near-term macro headwinds.
5. It deserves its premium valuation
From 2024 to 2027, analysts expect Costco's revenue and earnings per share to grow at a compound annual growth rate of 7% and 10%, respectively. Those growth rates might seem a bit low for a stock that trades at 48 times next year's earnings, but I believe Costco's evergreen business model justifies that higher valuation.
So unless Costco's comps and margin decline, it stops gaining cardholders, its renewal rates slip, and it halts its ongoing brick-and-mortar expansion, I think it will continue to command a higher multiple than many of its retail peers. That's why its recent pullback should be considered an excellent buying opportunity for long-term investors.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Walmart. The Motley Fool has a disclosure policy.
