Financial Report Outlook | The weaker the consumption, the better the business? Costco (COST.US) Q2 financial report may once again prove its status as the "king of anti-recession".

Costco (COST.US) will release its second-quarter financial report after the U.S. stock market closes on March 5th, Eastern Time. Market expectations are generally that the company's Q2 revenue will be around $69 billion, with earnings per share of $4.50. Costco: A business model born for difficult times Since reaching its peak, the stock price of this warehouse-style retail giant has continued to decline over the past few months, as consumer data has weakened. Fortunately, the recent trend of funds rotating out of tech stocks has helped the stock stabilize and push its price up by about 17% since the beginning of the year. In fact, the tough economic environment should be a positive factor for Costco, as the core reason lies in its reputation for selling goods at extremely low profit margins. Its food items, like rotisserie chicken and the iconic hot dog, can even be sold below cost as "loss leaders." Because of this well-known characteristic, when consumers feel strapped for cash under economic pressure, Costco can capture more market share. Currently, consumers are feeling the pressure of store prices, with overall sentiment low. For many years, the inflation rate has consistently been higher than the target level, and Costco's sale of these core products was the main factor driving inflation up last year. This is prompting consumers to make smarter choices when shopping, such as increasing the categories and quantities of purchases at Costco. This can be confirmed from Costco's membership statistics. Data shows that from 2014 to 2021, during a period when the inflation rate was about 1.9%, Costco's average membership growth rate was about 5.5%. In the years 2022 to 2025, with inflation once again becoming a national topic and the Consumer Price Index rising by an average of about 4.4% annually, Costco's membership growth rate has increased to around 7%. In addition, Costco's flagship brand, Kirkland Signature, a brand known for its "high quality at low prices," has become an undeniable competitive advantage in the current low consumer sentiment period. Kirkland generally sources its products from suppliers that also produce for well-known brands, with few differences in quality (for example, Kirkland Vodka is produced by Grey Goose, and Kirkland Coffee is produced by Starbucks Corporation). This is widely known among Costco consumers and is a key reason for attracting repeat purchases and increasing average spending per customer. It is one of the few affordable alternatives on the market that consistently offers value for money, and is one of Costco's core assets in accumulating a large base of satisfied consumers. The "low consumer sentiment" is a current macroeconomic narrative that cannot be avoided, and Costco is a clear beneficiary of it. As long as the quality of the alternatives remains high, consumers are willing to give up name-brand products. Kirkland's market positioning perfectly aligns with this logic. As long as this trend continues as the Federal Reserve has started lowering interest rates due to inflation still being above target, this trend seems to have no immediate end Costco is expected to continue benefiting from the trend of consumers seeking price relief by moving away from traditional retail stores and non-membership large supermarkets. Outlook for Costco's Q2 performance First and foremost, many market participants are expected to closely monitor Costco's stance on tariff issues. Costco was one of the plaintiffs suing the U.S. government, and the Supreme Court has ruled on violations of the International Emergency Economic Powers Act (IEEPA) related to tariffs. Though the company may not mention tariff refunds in the short term, as the Supreme Court has not ruled on the matter (the case has been sent back to the lower court for review), once mentioned, it will be a significant positive for the company. Since tariffs were imposed last year, Costco has paid significant tariffs, as nearly one-third of its goods are imports. Tariff refunds will be eagerly anticipated by the market as a cash flow inflow, estimated to be between $500 million and $2 billion, but investors currently do not know the specific amount of IEEPA tariffs Costco has paid. Costco's strong January sales performance, with net sales of about $21 billion, up 9.3% year on year; and sales up 8.5% for the first 22 weeks of the fiscal year (almost half the fiscal year), have been solid and in line with market expectations. However, there are several aspects in the financial report that are worth paying special attention to, as failing to meet or exceed expectations could attract market attention The market is always focused on membership growth rate, and if, as mentioned earlier, the growth rate slows, market sentiment is likely to turn cold. This judgment also applies to membership tier structure and renewal rates. Given the current trend, it is not expected that these data will worsen, but precisely because expectations are in line, any deviation below expectations could trigger unexpected fluctuations. The market also has high hopes for Costco's online sales growth rate, which has been in the double digits and performing well. This category has seen rapid growth in recent years, and any decline could be a significant negative for the market. Costco rarely provides forward guidance, so the market can only rely on Wall Street expectations. Investors expect Costco to "stay the course" and maintain its current growth trajectory. Costco is like a well-oiled machine, and as long as it can deliver results that meet expectations, the market will likely respond positively. In the earnings conference call, the only significant negative news that could cause concern is pressure on gross profit margins. Costco's gross profit margin is already low, and if it is unable to recover some margin after winning the tariff lawsuit, it will be difficult for the market to accept. Objectively speaking, the current tariff situation remains extremely unclear as new tariff policies have been put in place to replace the old measures. Costco's valuation is high, but it has become the norm Compared to its competitors, Costco's valuation is still high. The company's price-to-earnings ratio is very high, even comparable to tech software companies that have not experienced significant corrections. Furthermore, Costco's operating profit margin is higher than the expected price-to-earnings ratios of its peers. This valuation includes a significant goodwill premium, as reputation remains crucial to consumers, especially in the current economic environment. Additionally, the market expects Costco to have growth capabilities that other companies do not, allowing it to continuously penetrate new markets; for example, BJ's Wholesale Club is limited to the domestic U.S. market, while Costco has substantial overseas revenue. For Costco, a very fitting description is "a certainty asset," as the market sees it as a company with certain inherent qualities, such as the ability to perform well during economic downturns as mentioned at the beginning of this article. If this "certainty" is shattered, such as if a true economic recession comes and Costco fails to attract consumers as expected, its valuation premium may be at risk of being lost. Within the current valuation premium, some part of it undoubtedly pays the bill for the logic of being a "stock as insurance against a recession," and what makes this worrying is that it relies on a future outcome that investors have no control over. Conclusion Overall, the sales data so far shows Costco's strong growth momentum, and the macro environment is favorable to it, which will help the company deliver a positive performance in the second quarter. The goodwill accumulated by Costco also allows it to maintain its valuation premium when meeting expectations. The stock is not "perfectly priced," but its pricing does imply "no room for error" expectations. If the trend reverses, market sentiment could quickly turn, wiping out all gains made so far this year. Given that stock price volatility due to earnings reports is becoming more common, it is important to be vigilant against significant risks of underperformance. Of course, any statements about tariff refunds or prospects for lower tariffs are likely to trigger a positive market response. However, Costco's management is usually conservative in their forward guidance during earnings conference calls, and it is not expected that they will reveal too much relevant information in the short term.