How is Costco sustaining growth amid tariffs and expansion?

There’s never any rest for Costco’s buying team, as CFO Gary Millerchip and CEO Ron Vachris like to imply on the company’s quarterly conference calls. Event-based merchandising was at the forefront of another big quarter for Costco, which ended February 15. Following on from an outstanding Halloween and Black Friday last October and November, the buying team again attracted the warm glow of management approval for their success with the Lunar New Year and Valentine’s Day events in the latest quarter. As Millerchip remarked, “Laid out from stem to stem, the roses we sold in the US for Valentine’s Day this year would have stretched from Seattle to New York City and back again.”The company generated revenue of US$69.6 billion in its second fiscal quarter, an increase of 8.3 per cent from a year ago. The revenues consisted of US$68.2 billion in sales (up 9.1 per cent) and US$1.4 billion in membership revenues (up 13.6 per cent). Gross margin rose a little to a shade over 11 per cent, and net income after tax rose 13.8 per cent to US$2 billion.Comparable-store sales in all broad geographies increased strongly in the quarter, continuing from the first quarter. For the first six months of the fiscal year, comps are up 6.1 per cent in the US, 8.3 per cent in Canada, and 7.0 per cent in international (excluding Canada). Digitally enabled sales are up 21.2 per cent. Global comps were up by 6.7 per cent. All of these numbers are adjusted for fuel price and foreign exchange fluctuations. Customer traffic and average transaction value (“average ticket”) were both up.DigitalDigital, an area of focus for Costco, keeps improving as the company implements technology to enhance the customer experience, for example, through improved product displays and more personalised marketing based on customer browsing patterns. The personalised product “carousels” drove US$470 million in e-commerce sales during the second quarter. More people are downloading and using the app – app visits are up 63 per cent – and average e-commerce order value is up 15 per cent.Leading sales categories on digital were gold/jewellery, with an assist from the run-up in precious metals prices, but also partly attributable to greater adroitness from the buying team in merchandising for the Chinese New Year. Other hot-selling items were toys, small electrical items, housewares, and pharmacy items. Oh no, tariffs are a thing againThe company has had a good grip on the tariff situation since it first emerged almost a year ago, but it has once again become muddied. A Supreme Court ruling in February struck down the so-called Trump tariffs, which were promptly replaced with a global 10 per cent tariff. Millerchip emphasised again on the company’s March 5 call that Costco was continuing to deal with the changing tariff situation by shifting sourcing across countries for affected items, sourcing domestically when possible, and increasing the penetration of its Kirkland Signature house brand, over which the company has greater sourcing control and which has a price advantage of 15–20 per cent. The range of items under Kirkland continues to expand: in the latest quarter, the company introduced new products ranging from zip-pullovers to double chocolate mint sundaes.It is possible that some of the Trump tariff funds already collected may be returned to retailers. However, the timing is uncertain since the administration, unhappy with the Supreme Court’s decision, cannot appeal it but can hinder the refund process with a combination of administrative and legal go-slow tactics. Whatever comes back to Costco will, according to Millerchip, be reinvested in price leadership.Member income: Renewal rate touches 90 per centCostco ended the quarter with 82.1 million paid members worldwide, with a renewal rate remaining near 90 per cent globally, slightly higher in the US and Canada. Membership income rose by 13.6 per cent, reflecting that the membership fee increase in the US and Canada, beginning last September, has positively impacted that number by a little under 50 per cent. To shore up renewals, Costco is sharpening its communications with those at the expiration threshold, since new members are younger, more apt to sign up digitally, and don’t renew at as high a rate.Company still targeting 30 new warehouses a yearOver the course of the second quarter, Costco opened three net new warehouses, bringing its total to seven for the year to date and bringing its total store fleet to 924 member warehouses, of which 634 are in the US, 114 in Canada, and 176 outside the US and Canada. Of the latter, 78 are in Asia, in Japan, Korea, Taiwan and China. At the end of the 2026 fiscal year, the company expects to have an additional 18 net new stores operating, all but two of which will be in the US and Canada.Management stated late last year that the newest Costco warehouses are generating an annualised average of US$190 million, up from approximately US$150 million previously, suggesting that the strategy of infilling the US market is working well, despite no dramatic change in strategy. As Vachris put it, “We’re not changing the model, but we’re getting a little creative with the use of things like parking decks. If we want to get into some of these inner cities, we’re not going to find 25 acres available for us to go into.”The creativity to take advantage of smaller land parcels is highly desirable, as markets are strong and newer infill stores help relieve congestion at existing high-volume stores. Vachris observed that the latter come back quickly in terms of traffic and sales. “As we relieve a high-volume warehouse, those tend to build back very quickly,” he said.Further reading: Inside Costco’s profit surge and the economics of buying differently.