Costco Powers Ahead: Strong Sales, Surging Memberships, and a Smart Tariff Strategy
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Costco Wholesale Corporation delivered a strong performance in its third quarter of fiscal 2025 (Q3 FY25, ended May 11, 2025), with net sales rising 8.0% to $61.96 billion and net income increasing 13.2% to $1.903 billion. The company’s membership model continues to drive growth, with membership fee income up 10.4% to $1.24 billion and a paid membership base of 79.6 million, reflecting high renewal rates of 92.7% in the U.S. and Canada. Costco is expanding its global footprint, opening 9 new warehouses in Q3 and planning 10 more in Q4, while its e-commerce segment grew 14.8%. Despite macroeconomic challenges like inflation and tariffs, Costco is maintaining its competitive edge by absorbing some tariff costs, rerouting supply chains, and lowering prices on key items. This strategy contrasts with competitors like Walmart and Target, who are passing tariff costs to consumers, positioning Costco favorably in the retail landscape.
Financial Performance
Costco’s Q3 FY25 financial results underscore its operational strength and ability to navigate economic challenges.
Sales Growth: Net sales increased 8.0% to $61.96 billion, with comparable sales up 5.7% (8.0% adjusted for gasoline prices and foreign exchange). U.S. comparable sales grew 6.6% (7.9% adjusted), Canada 2.9% (7.8% adjusted), and other international markets 3.2% (8.5% adjusted). E-commerce comparable sales surged 14.8% (15.7% adjusted).
Membership Trends: Membership fee income rose 10.4% to $1.24 billion, with a 4.6% boost from a recent fee increase. Paid household members grew 6.8% to 79.6 million, and executive members increased 9% to 37.6 million. Renewal rates remained strong at 92.7% in the U.S. and Canada and 90.2% worldwide.
Profitability: Net income rose to $1.903 billion, despite a $130 million LIFO charge and a $40 million employee vacation accrual. The gross margin improved by 41 basis points to 11.25%, driven by strong fresh food performance and lower commodity costs (e.g., dairy, eggs, olive oil). SG&A expenses increased by 20 basis points to 9.16%, reflecting wage investments and preopening costs, partially offset by sales leverage.
Year-to-Date Performance: For the 36 weeks ended May 11, 2025, net sales reached $185.48 billion, up 8.2% from $171.44 billion, with comparable sales up 5.7% (8.1% adjusted).
These results highlight Costco’s ability to drive top-line growth while maintaining profitability in a challenging environment.
Commercial Developments
Costco is pursuing aggressive growth in both physical and digital channels:
Warehouse Expansion: The company opened 9 new warehouses in Q3 FY25, including relocations in Melbourne, Australia, and Japan, and plans to open 10 more in Q4, reaching a total of 914 by year-end. New locations include Highland, California (March 8, 2025), Weatherford, Texas (March 15, 2025), and international markets like Sweden, Korea, and Canada (New Locations).
E-commerce Initiatives: E-commerce comparable sales grew 14.8% (15.7% adjusted), driven by a 20% increase in site traffic, a 3% rise in average order value, and a 31% increase in Costco Logistics deliveries. A new partnership with Affirm for “Buy Now, Pay Later” options enhances big-ticket item purchases, while technology pilots aim to streamline checkouts.
Private Label Strength: Kirkland Signature sales outpaced overall growth, with penetration up 50 basis points year-over-year. New products like mini muffin bites and smoked pork ribs were introduced, and prices were lowered on items like organic olive oil (from $24.99 to $18.39), mixed nut butter (from $8.69 to $7.59), and chocolate macadamia clusters (from $17.99 to $14.69).
Membership Growth: The company’s focus on member value continues to drive loyalty, with executive members accounting for 73.1% of sales penetration.
These initiatives reflect Costco’s commitment to enhancing accessibility and member experience while maintaining its value-driven model.
Macroeconomic and Consumer Trends
Costco operates in a complex macroeconomic environment:
Inflation: Inflation remained in the low single digits for fresh foods and food/sundries, but nonfoods saw slightly higher inflation, contributing to a $130 million LIFO charge in Q3 FY25. Management anticipates an additional $40–50 million charge in Q4 if inflation persists.
Consumer Behavior: Consumers are cautious, prioritizing value, quality, and newness. Costco’s strategy of lowering prices on essentials like eggs, butter, and olive oil, and extending gas station hours to drive record gallon sales, aligns with this trend.
Supply Chain Dynamics: While supply chains are relatively stable, they are less predictable than pre-COVID. Spot shipping rates have risen due to paused reciprocal tariffs, but Costco’s contracts have minimized the impact.
Costco’s ability to adapt pricing and sourcing strategies has helped maintain member loyalty and drive traffic in a value-conscious market.
Competitive Landscape
Costco’s performance stands out against key competitors:
Walmart: In Q1 FY26 (ended April 30, 2025), Walmart reported 2.5% revenue growth, with operating income up 4.3%. Walmart U.S. comparable sales (ex-fuel) grew 4.5%, and Sam’s Club saw 6.7% growth. Global e-commerce grew 22%, and membership fee income rose 14.8% (Walmart Q1 FY26 Earnings). Walmart plans to open 5 new stores and 1 Sam’s Club by September 2025 (Walmart Expansion).
Target: In Q1 2025 (ended May 4, 2025), Target reported a 2.8% decline in net sales to $23.8 billion, with comparable sales down 3.8%. Operating income rose 13.6% to $1.5 billion, but adjusted EPS fell 35.9% to $1.30 (Target Q1 2025 Earnings). Target lowered its full-year sales forecast due to tariff pressures and margin challenges from shrink and markdowns.
Sam’s Club: Part of Walmart, Sam’s Club is pursuing an ambitious growth strategy, planning to open 15 new locations annually and remodel all 600 existing stores. It also aims to remove synthetic dyes from its private brand by the end of 2025, appealing to health-conscious consumers (Sam’s Club Strategy).
Costco’s 8.0% net sales growth and 5.7% comparable sales growth outpace Walmart’s 2.5% and 4.5% (U.S.), respectively, and Target’s -2.8% and -3.8%. Costco’s focus on maintaining price stability contrasts with competitors’ plans to raise prices due to tariffs, reinforcing its value proposition.
Impact of Tariffs and Global Trade
Tariffs have introduced significant challenges for retailers, but Costco has adopted a proactive approach:
Tariff Mitigation: Costco is rerouting supply chains, increasing local production (e.g., U.S.-made mattresses, laundry products in Asia), and absorbing some tariff costs to avoid broad price increases. For example, it held prices on pineapples and bananas despite tariff hikes but raised prices on items like flowers (Tariff Impact).
Inflation Impact: The $130 million LIFO charge in Q3 FY25 was driven by inflation, particularly on imported goods, with management noting ongoing monitoring of tariff and inflation trends.
Competitive Contrast: Unlike Walmart, which has warned of price hikes due to tariffs (Walmart Tariff Response), and Target, which is facing margin pressures, Costco views price increases as a “last resort” (Costco Tariff Strategy). This approach aligns with its member-first philosophy and has helped maintain its competitive edge.
Costco’s strategic adjustments demonstrate its resilience in navigating global trade disruptions while prioritizing member value.
Outlook and Strategy
Costco’s management expressed confidence in its long-term growth prospects during the Q3 FY25 earnings call:
Warehouse Expansion: The company plans to open 27 new warehouses in FY25 (24 net new), targeting high-growth markets like the U.S., Canada, and Asia (Costco Q3 FY25 Earnings).
Digital Transformation: Investments in e-commerce, including personalized recommendations, faster checkouts, and partnerships like Affirm, aim to sustain double-digit online growth.
Membership Focus: High renewal rates and growing membership numbers provide a stable revenue stream, with executive members driving significant sales penetration.
Economic Resilience: Costco is actively managing tariff and inflation risks through sourcing adjustments and supplier partnerships, aiming to maintain competitive pricing.
Despite uncertainties, Costco’s strong fundamentals, strategic investments, and member-centric approach position it well for continued success in a competitive and challenging retail environment.