We had the answer to the question I was watching before Costco Wholesale Corporation (NASDAQ: COST announced its fourth quarter and fiscal year earnings, namely that it did make more money and cash out of the $93.9 billion of merchandise it sold in Q4, as operating income climbed 13.8% to $3.80 billion and annual operating cash flow hit $15.83 billion.
The trouble here for stockholders is that sales are still cooling underneath those numbers. That definitely makes for a better contrarian setup than the straightforward $6.75 EPS beat. Costco’s total revenue increased 11.1% to $95.72 billion and diluted EPS rose to $6.75 from $5.87, but Q4 comparable-sales growth came in at 6.7% excluding gasoline and foreign exchange, down from the pace Costco was running earlier in the quarter.
The company continues to grow rapidly and squeeze more profit out of every dollar of sales. Now it’s up to the stock to prove that Costco can keep doing that as the sales engine loses some speed.
Costco Passed the Profit Test
I was hoping this report would give me some confidence that Costco could get more revenue out of its vast customer base and the income statement did just that.
Q4 net sales increased 11.2% to $93.87 billion, while operating income climbed 13.8% to $3.80 billion. Net income rose 14.9% to $3.00 billion, pushing diluted EPS up roughly 15% to $6.75.
The cost structure explains the acceleration. Merchandise costs increased 11.3%, almost matching the sales increase, while selling, general and administrative expenses rose only 7.9%. Costco therefore kept more of the incremental revenue after paying for the merchandise and overhead required to generate it.
That is exactly what the stock needed to see after the pre-earnings setup: the company isn’t simply growing sales; it is translating that growth into faster operating and earnings growth.
But there is a wrinkle inside the $6.75. Costco said Q4 diluted EPS received a $0.15 benefit from IEEPA tariff refunds, partially offset by reinvestment of those refunds into increased member values.
The quarter still produced strong underlying operating growth, so I wouldn’t reduce the entire earnings result to the refund. But that $0.15 will not simply appear again every quarter, which makes the operating-income growth more useful than the headline EPS number when judging the durability of the result.
The Sales Rate Is Still Moving Lower
This is the thread that connects directly to our pre-earnings article. Before the report, Costco had already told us Q4 sales were strong. The question was whether the company could convert those sales into enough profit and cash to defend the stock’s premium. We now know it did.
What has not changed is the direction of the underlying sales rate. Q4 total comparable sales came in at 9.4%, while adjusted comps excluding gasoline and foreign exchange were 6.7%. Digitally enabled comparable sales remained a standout at 19.5%.
The monthly progression makes the cooling more obvious. Adjusted comps moved from 8.0% in May to 7.0% in June, 6.6% in July and 5.4% in August before the full quarter settled at 6.7%. Costco also said the later Labor Day shift reduced August sales by a little less than 75 basis points, so calendar effects explain part of the August weakness.
Still, the direction is visible even after allowing for that distortion. Costco is therefore doing something investors should pay close attention to: earnings are accelerating faster than the underlying sales rate.
That works beautifully while the company protects its margins. It becomes a different story if sales keep slowing and Costco eventually has less room to squeeze additional profit from each dollar.
Membership Is Growing, Just Not As Fast As Revenue
The membership business was supposed to provide the recurring cushion underneath the merchandise operation, and Q4 showed that cushion remains substantial.
Costco collected $1.85 billion in membership fees, up from $1.724 billion a year earlier. That works out to roughly 7.3% growth, below the 11.1% increase in total revenue.
I don’t see that as a problem by itself. Membership fees are still growing at a healthy pace, and the company finished the year with $20.21 billion in cash and cash equivalents, compared with $14.16 billion a year earlier. Annual operating cash flow also increased to $15.83 billion from $13.34 billion.
But it does change the composition of the story. Merchandise revenue is growing faster than membership fees, while the underlying merchandise comp is cooling. Costco still has a powerful recurring-revenue base underneath the retail operation, but investors shouldn’t expect membership fees alone to compensate indefinitely for slower merchandise growth.
The Stock Has More To Prove Now
COST sits around $894.75, below its 20-day moving average near $910.80, its 50-day near $933.88 and its 200-day near $960.27. The shares remain well below the roughly $1,096 May peak.
That is a strange backdrop for a company that just reported $3.00 billion of quarterly net income and $15.83 billion of annual operating cash flow.
But the market is looking beyond the quarter now. Costco proved it can grow profit faster than sales. It proved the business can generate enormous cash. It also showed that the underlying sales rate continues to cool and that $0.15 of Q4 EPS came from a non-recurring tariff refund benefit.
That leaves me with a different scoreboard than the one I had before earnings: Can Costco keep expanding earnings faster than sales as the comp rate comes down?
The $93.9 billion sales haul cleared the first hurdle. Now Costco has to show that the profit engine can keep doing the heavy lifting after the sales engine loses more speed.
