Costco defies tariff shifts with higher profit, lower prices

Costco Wholesale Corp. posted better-than-expected earnings in the third quarter, a sign that the nation’s largest club chain is flexing its scale and devoted following to navigate tariffs and economic turbulence.

The retailer said it generated earnings per share of $4.28 for the quarter ended May 11, above what Wall Street analysts were expecting. The metric suggests that Costco is maintaining profitability even as consumers prioritize necessities to save money.

The shares were little changed Friday morning before regular trading in New York. Through Thursday’s close, the stock had advanced 10% year to date.

Costco is the latest big-box retailer to post quarterly results, as investors and analysts search for clues on how shoppers are spending and what they are buying. Many consumer-facing companies have posted soft results in recent weeks with Target Corp., Procter & Gamble Co. and Kraft Heinz Co. slashing their annual outlooks. Walmart Inc. and a handful of names have been outliers with strong results.

Sweeping, on-again, off-again U.S. tariffs have upended operations across industries, fueling chaos among companies, investors and consumers. Courts are weighing in on whether these tariffs can stay in effect.

“We are basing our decisions really based on what we know” and what’s in place today, Chief Financial Officer Gary Millerchip said in an interview, adding that Costco hasn’t made changes in response to court orders this week as tariffs are still in effect. “It’s difficult to make decisions on items that we just don’t know what the outcome will be.”

At Costco, price increases are expected to hit later in the year as the company starts to sell new inventory. It won’t be a “one-size-fits-all” scenario, Millerchip said. The retailer is likely to hold prices of some items steady and raise others. Costco may stop selling certain products if they become too expensive, and timing will also vary for items.

In addition to working with suppliers, Costco is rerouting goods sourced from countries with high tariffs to other markets, Chief Executive Officer Ron Vachris said on a call with analysts Thursday. About a third of Costco’s U.S. sales come from goods imported from other countries.

In the U.S., it’s sourcing more locally-produced mattresses, pillows and other items. The retailer also pulled forward some summer products such as sporting goods — an effort that helped Costco keep prices low.

Amid tariff-driven cost increases, Costco is examining potential price changes on an item-by-item basis, executives said. For example, it held prices of pineapples and bananas — sourced from Central and South America — but raised those of other goods that are more discretionary.

As commodity costs have dropped in recent months, Costco lowered prices of eggs, butter and other key staples. These deals, and expanding hours for gas services, helped its performance. Still, prices of nonfood items rose in the low-single digits for the first time in a number of quarters due to imported goods, executives said.

“It’s full-force ahead on lowering prices where we can,” Vachris said.

Costco tends to be more resistant to economic volatilities because its customers skew more affluent and pay a fee to shop at its network of more than 800 stores. The company — known for its ever-changing assortment of mega-sized products — has been expanding its popular Kirkland brand and investing in its digital operations.

Historically, it has sacrificed short-term profit margins to gain members, drive loyalty and grow business. The company’s limited-assortment model and large scale also give it more flexibility on what it sells.

Against the backdrop of tariffs, measures of U.S. consumer sentiment have deteriorated during most of the Trump administration on fears of an economic fallout. Spending has generally held up so far, though tariff-driven price increases are starting to hit store shelves.

Many companies have signaled that they will be strategic and surgical about price increases, holding down costs of some items and discontinuing other products should they get too expensive. Overall, clothes, electronics and home goods are among the most vulnerable to levies.

Costco, which reports monthly sales ahead of earnings, said its comparable sales excluding gas and currency fluctuations rose 8% during the latest quarter. E-commerce sales grew about 16% during the quarter. Traffic to website and stores also rose. Gold, toys and health and beauty items were among top sellers.