Here’s what impressed us most about Costco’s earnings beat in a tariff-filled

Costco on Thursday returned to its old ways of delivering earnings beats. Despite concerns about a tariff-driven hit to margins, the retailer’s better-than-expected results showed it is prepared to handle whatever challenges it may face. Total revenue in its third quarter of fiscal year 2025 increased 8% year over year to $63.2 billion, topping Wall Street expectations of $63.19 billion, according to estimates compiled by LSEG. Earnings per share (EPS) in the 12 weeks ended May 11 came in at $4.28, beating the consensus of $4.24, LSEG data showed. Shares of Costco were slightly lower in extended trading Thursday, along with U.S. equity futures more generally. Bottom line Costco turned it around this quarter after a surprising EPS miss the last time it reported. Because Costco reports its sales on a monthly basis, its topline figures are pretty well understood by the market when it comes time to report. What isn’t known is profitability metrics. That’s why we were pleased to see both Costco’s gross margin and operating margin top Wall Street expectations, rising 41 basis points and 25 basis points, respectively, on an annual basis. A basis point is equal to 0.01 percentage point. Costco doesn’t rely on raising prices to boost profits. It’s the company’s philosophy to only raise prices as a last resort. Instead, it focuses on keeping prices low, delivering greater value to its members, and driving higher sales volumes while efficiently managing costs—making its strong results even more impressive. Why we own it Costco is the best-run retailer in the world, with a business model focused on offering its members a relatively small universe of products at hard-to-beat prices. Costco has succeeded for decades, but the high inflation of recent years has made the company’s value-focused ethos really shine. Competitors: BJ’s Wholesale , Walmart , fellow Club holding Amazon Last buy: June 15, 2020 Initiation date: Jan. 27, 2020 One analyst remarked on the earnings call that the company has increased its operating margin — also referred to as earnings before interest and taxes (EBIT) margin — on a year-over-year basis for the eighth or ninth quarter in a row. By our count, it is eight — with its February 2023 quarter being the last time operating margin contracted compared with the year-ago period. Regardless, the analyst’s overarching point holds true: That’s an impressive streak for a retailer obsessed with providing customers value like Costco. We were even more impressed by how Costco improved its margins during a period when many retailers scrambled to figure out how to navigate President Donald Trump’s higher tariffs on goods entering the U.S.. This is where Costco’s size, global scale and limited product offerings really shines. The company said it rerouted goods sourced from countries with high tariff rates to non-U.S. markets, . And for the U.S., it pulled forward items it had planned for the summer and increased locally produced goods to reduce tariff impact. If other retailers are out of stock early this summer because they could not afford to pay the tariff, it means more opportunities for Costco to gain share. Another way Costco is mitigating the impact of tariffs is by moving more sourcing for its in-house Kirkland Signature products into the countries or regions where the item is sold. Notably, sales of Kirkland Signature items outpaced Costco’s overall sales growth in the quarter. As we highlighted in a feature story in March , Kirkland Signature products tend to carry a higher margin than branded items, and the label’s overall popularity has been key to Costco’s success. Costco’s quarter had a lot to like from it. The consistent sales growth, slow but steady margin improvement, and the ability to navigate tariffs are as good, if not better, than any retailer. That’s why the stock is up about 10% year to date, outpacing Walmart’s 7% rise and the flat S & P 500. However, we are reiterating our 2 rating, meaning we’ll wait for a pullback before buying more. Our only hesitation here is the stock’s lofty price-to-earnings valuation. We are reiterating our price target of $1,100 a share. Quarterly commentary Total comparable sales, an important retail industry metric, increased 5.7% in the quarter and 8% on an adjusted basis, which strips out changes from gasoline prices and foreign exchange. By category, both fresh and non-foods comp sales increased in the high-single digits. Some outperforming non-food categories were gold and jewelry, majors (large ticket items), toys, housewares, and home furnishing. As mentioned, gross margins improved 41 basis points versus the year-ago period to 11.25%, exceeding expectations of 10.92%. Core merchandise was the largest driver of the year-over-year gross…