Costco’s Engine Is Roaring, So Why Is the Stock Sputtering?

The warehouse giant is putting up big numbers by leaning on its value playbook, but investors are looking under the hood at the cost of that growth.

At first glance, Costco (COST)’s latest quarterly report looked like business as usual. Sales were strong, and the company’s core value proposition is clearly clicking with shoppers. So why did the stock drop -3.9% the next day?

Because for a company famed for its operational perfection, this quarter’s growth came with a few scuffs. The real story isn’t about the solid sales figures. It’s about whether Costco is having to spend more to get them, potentially straining the profit machine that investors have come to rely on.

The Gas Pump Is Working Overtime

Let’s be clear: the top line is humming. Adjusted for gas prices and currency swings, comparable sales grew. The company’s digital efforts are also firing, with digitally-enabled sales jumping.

Much of this quarter’s energy came from the gas station. As prices at the pump climbed everywhere, Costco leaned in, driving what management called “record breaking volumes.” This price sensitivity also pulled in new customers to its pumps, a smart way to get members more hooked on the ecosystem. Even better, the most lucrative customers are doubling down, with high-spending paid executive memberships growing 9.6% from last year.

But It’s Burning More Fuel to Get There

Here’s the rub. That growth didn’t come for free. The company’s core-on-core margins, a key measure of profitability on its merchandise, were “lower by 9 basis points.” Management noted this was a strategic choice, as they “invested in lower prices for our members on several everyday items. such as eggs and beef.”

That’s the Costco playbook, but the spending didn’t stop there. Even with strong sales, the company didn’t quite manage to leverage its operating costs. Excluding gas, SG&A expenses were a touch higher as a percentage of sales, as management said “underlying improvements in productivity were offset by higher healthcare costs.” For a company that runs on razor-thin margins, even small slips in efficiency get noticed.

Is the Membership Pipeline Slowing?

This pressure on profitability is getting more attention because a key fuel for future growth appears to be moderating. Total paid memberships grew 4.1% versus last year. While still growth, one analyst on the call characterized the rate as the “lowest level in some time.” Since new members ramping up their spending is a critical part of Costco’s growth formula, a slowdown there makes the current margin pressure feel a little less like a temporary investment and a little more like a trend.

The result is a company whose value proposition is arguably more relevant than ever, but whose cost of maintaining that leadership may be rising. While management frames the margin pressure as a tactical investment, the slowdown in new members makes it feel more like the start of a worrying trend. For the answer, investors should watch next quarter’s core-on-core margin figure to see if Costco’s profit engine is truly starting to leak oil.

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