COST: A 12% Clean EPS Gain Meets an 18.5% Hurdle

The 60-second read

Five things to know

1. The beat survives normalization. Q4 EPS was $6.75; removing the $0.15 tariff-refund benefit leaves $6.60, still up 12.4%.
2. The membership engine remains durable. Paid members grew 3.8%, worldwide renewal was 89.8%, and membership income rose 7.7% excluding currency.
3. Cash conversion improved. FY free cash flow reached $9.390B and net cash reached $15.139B before leases.
4. The price demands acceleration. Our reverse model needs roughly 18.5% annual cash-flow growth for five years versus an 11.7% recent CAGR.
5. The call stays HOLD. Our $850 base is below the $897.02 early trade; a lower price or faster cash growth would improve the expected return.

Three scenarios, one probability-weighted number

Analyst scenarios, not management guidance; probabilities are judgments.

Signposts: what would change our mind

Green/red thresholds are Charged Alpha decision rules. Costco did not provide earnings guidance.

The moat is real; the hurdle is 18.5%

Costco finished fiscal 2026 with another high-quality operating result, and the market already knows what kind of company it owns. The dated reference is an early after-hours trade of $897.02 at 4:29 p.m. Eastern on September 24, after a $896.48 regular close. That is a move of only 0.06% since the print. It is evidence that the first reaction was muted, not a completed-session verdict. Thin early trading can change before the next close.

Our call is HOLD with three-out-of-five conviction and high uncertainty. The base value is $850, the scenario range is $650 to $1,100, and the probability-weighted value is $862.50. The current price is about 5.5% above the base value. Costco's membership model, renewal rates, balance sheet and execution deserve a premium. The question is how large a premium can still produce an attractive owner return from today's price.

The reverse cash-flow test makes that burden visible. Starting from $9.0 billion of normalized owner cash flow, using an 8.5% discount rate and 4% perpetual growth, the current enterprise value requires approximately 18.5% annual cash-flow growth for five years. Actual free cash flow compounded about 11.7% annually from FY2023 through FY2026. The market-implied rate can be achieved only through some combination of member growth, fee income, comparable sales, margin discipline and capital efficiency that is stronger than the recent cash record.

This is not an argument that a high multiple must immediately contract. Costco has repeatedly earned trust through value, renewal and disciplined operations. It is an argument about asymmetry. At a lower price, the same business quality becomes a larger asset. Near $897, a good outcome must include both strong economics and a continuing willingness to pay a premium multiple. The packet therefore separates the operating thesis from the valuation thesis and gives each a dated test.

The print: double-digit growth after normalization

Fourth-quarter net sales were $93.873 billion, up 11.2% from $84.432 billion. Membership fees added $1.850 billion, bringing total revenue to $95.723 billion. The distinction is important because some market-data feeds label net sales as revenue while consensus services may use total revenue. Comparing $93.873 billion of net sales against a total-revenue estimate would manufacture a miss. This packet does not publish a revenue surprise percentage unless the definitions match.

Operating income rose to $3.801 billion from $3.341 billion, an increase of 13.8%. Net income reached $2.998 billion and reported diluted EPS reached $6.75, both up roughly 15%. The quarter benefited by $0.15 per share from IEEPA tariff refunds received, after partial reinvestment in member values. Removing that benefit produces $6.60 of normalized EPS, still 12.4% above the prior-year $5.87. The direction of the result does not depend on the refund; the exact magnitude does.

For the full year, total revenue was $303.154 billion, up 10.1%; operating income was $11.685 billion, up 12.5%; and net income was $9.226 billion, up 13.9%. Diluted EPS was $20.76 versus $18.21. Normalized for the Q4 tariff item, FY2026 EPS is $20.61, growth of 13.2%. That is a strong year for a company already operating from a vast revenue base.

Costco did not issue conventional earnings guidance. The operating supplement estimates 967 warehouses at the end of FY2027, up from 939, but that is a unit plan rather than a revenue, margin or EPS forecast. Our forward earnings assumptions come from the saved analyst-consensus dataset and our models. They should not be described as management promises.

The operating flywheel: traffic, ticket, digital and members

Costco reports the fourth-quarter demand picture through geographic comparable sales rather than stand-alone profit segments. Reported total-company comparable sales grew 9.4%. Excluding gasoline-price and foreign-exchange changes, the rate was 6.7%. The U.S. led adjusted growth at 7.2%; Canada delivered 4.6%; Other International delivered 6.2%. This breadth reduces dependence on one country, although currency and regional costs can still change reported results.

Traffic and ticket contributed equally on the adjusted basis. Comparable traffic increased 3.3%, while adjusted ticket increased 3.3%. That balance is healthier than growth produced entirely by price. Reported ticket increased 5.9% because gasoline and currency affected the denominator. The operating supplement lets us avoid calling every difference consumer inflation or volume.

Digitally enabled comparable sales grew 19.5% reported and 19.8% excluding currency. Pharmacy, home furnishings, small electrics, hardware, housewares and domestics were the highlighted online categories. Costco expanded third-party same-day delivery and improved personalization in email and product placement. The release does not disclose digital profit, fulfillment expense or a separate digital asset. The growth is a customer-engagement signal, not permission to apply a software multiple.

The membership base connects these channels. Paid memberships reached 84.1 million, cardholders 150.4 million, and Executive memberships 42.3 million. Executive members accounted for 75.6% of sales. Paid memberships grew 3.8% and cardholders 3.6%, faster than the planned 3.0% warehouse increase for FY2027. That suggests the existing network is still deepening, although online promotions can bring in cohorts with different renewal behavior.

Profit quality: core improvement plus a one-time lift

The margin story requires two views. Reported Q4 gross margin was 11.02%, down 11 basis points. Excluding gasoline's effect on the sales denominator, gross margin improved 20 basis points. Core was nine basis points unfavorable on the ex-gas bridge, other businesses added 32 basis points, LIFO reduced margin by 12 basis points, and the tariff-related item added nine basis points. A separate core-on-core sales measure improved 18 basis points after excluding the tariff refund and partial reinvestment.

SG&A was 8.94% of net sales, versus 9.21% a year earlier. The ratio improved 27 basis points reported and two basis points excluding gasoline. Operations contributed 22 basis points of reported improvement and were flat excluding gasoline; central costs contributed five basis points reported and two excluding gasoline. Costco's low-price model requires enough gross dollars, membership income and expense discipline to support member value and returns. Small basis-point movements matter when applied to $93.873 billion of quarterly net sales.

The $0.15 EPS tariff benefit is material but not dominant. At 444.364 million diluted shares, it represents about $66.7 million after tax. Reported Q4 net income exceeded the prior year by $388 million, so most of the improvement remains after removing the refund. The company also says it partially reinvested the refund in lower prices. That choice can strengthen member loyalty even though it reduces the immediate benefit retained in earnings.

Interest expense declined to $45 million while interest income and other rose to $253 million. The large net-cash position therefore contributes to profit. We value operating income and net cash separately so that interest income is not capitalized as merchandise economics and cash is not added twice. The high multiple must be justified by the combined business system, not by recasting a one-time refund or treasury income as recurring store margin.

The nine-check earnings-quality scorecard

The scorecard is strongest when it refuses to collapse every signal into one color. Revenue is reconciled directly: net sales plus membership fees equals total revenue. The current release contains one explicit special item, and the normalized result remains strong. Cash conversion is good for the year. The balance sheet is net cash. Those are meaningful positives.

Owner costs still exist. Stock compensation was $924 million for FY2026, approximately 0.30% of revenue and 10.0% of net income. The expense does not threaten Costco's economics, but it should not disappear merely because the revenue base is large. Share repurchases of $848 million were $76 million below the $924 million stock-compensation expense. Diluted share count still fell slightly; buybacks and accounting expense measure different things, so their comparison alone does not establish dilution.

The tax rate was approximately 24.7% for the year and 25.2% for Q4. Interest coverage was about 80.6 times on annual operating income. These measures support the view that reported earnings are economically robust. They do not solve valuation: a high-quality dollar of earnings can still produce a weak return if purchased at too demanding a price.

The amber estimate-comparability flag is procedural and important. Data vendors can map Costco's net-sales line into a generic revenue field, while analysts may estimate total revenue including membership fees. The two measures differ by $1.850 billion this quarter. A precise surprise calculation with mismatched definitions would look quantitative and be wrong. The packet preserves the raw fields and declines to make that claim.

Cash flow and the balance-sheet option

Operating cash flow was $15.825 billion for FY2026, up $2.490 billion. Capital spending rose $937 million to $6.435 billion, leaving $9.390 billion of free cash flow. Free cash flow grew faster than net income for the year. That provides room to invest, repurchase stock, pay the regular dividend and retain liquidity. It is the strongest counterargument to a purely multiple-driven bearish view.

The quarterly cash-flow estimate is a transparent subtraction. The annual release reports $15.825 billion of operating cash flow and $6.435 billion of capital spending. Subtracting the Q1, Q2 and Q3 amounts aligned to the filed quarter records yields approximately $4.692 billion of Q4 operating cash flow, $2.207 billion of Q4 capital spending and $2.485 billion of Q4 free cash flow. The values are useful for trend analysis but are labeled computed because the release does not print a quarter-only cash-flow statement.

Cash and cash equivalents ended at $20.207 billion, with $1.094 billion of short-term investments. Debt was $6.162 billion, producing $15.139 billion of net cash before lease liabilities. Accounts payable of $22.591 billion exceeded inventory of $19.324 billion, reflecting supplier financing within the retail model. Receivables were $3.959 billion. Deferred membership fees of $3.006 billion are collected cash paired with a service obligation.

Costco spent $6.435 billion on property and equipment, consistent with an expanding physical network. It repurchased $848 million of stock and paid $2.458 billion of dividends. Those cash uses fit within free cash flow. The latest annual report's repurchase authorization expires in January 2027; the remaining amount cited there is a dated FY2025 balance, not current capacity. We do not assume a special dividend or accelerated buyback that management did not announce.

Three routes, one demanding market price

The base value is $850. It is a rounded blend rather than a claim of single-dollar precision. The forward-earnings route uses the saved FY2027 consensus EPS of $22.66 and a 39-times multiple, producing $883.82. Thirty-nine times is already a large premium that assumes renewal, traffic and profit growth remain exceptional. It is lower than the current normalized trailing multiple because future earnings must grow into the price.

The enterprise route applies 28.5 times saved FY2027 consensus EBIT of $13,593.9 million, adds $15,139.0 million of net cash and divides by the provider share count. The result is $907.74. Enterprise value keeps the cash and operating business from being mixed. The route is sensitive to the EBIT forecast and to how much cash must remain inside the business.

The cash route starts with $9.0 billion of normalized equity cash flow, grows it 14% for five years, discounts at 8.5%, applies 4% terminal growth, adds net cash and divides by shares. The result is $752.69. This is below the market because even a 14% five-year growth assumption does not reproduce the premium embedded in the stock. Terminal value remains a large part of the model, so small changes to long-run assumptions matter.

A 35% earnings, 35% enterprise and 30% cash weighting gives $852.85, rounded to $850. The routes are not statistically independent because they share assumptions about growth, margins and capital needs. Blending reduces dependence on a single formula; it does not eliminate model risk. The range of $650 to $1,100 is wider than the route spread to reflect multiple sensitivity and execution outcomes.

At $897.02, the market-implied cash-flow path is the key decision variable. The same model needs 18.5% annual growth for five years, compared with the 11.7% recent CAGR. That gap can close through stronger growth, a lower required return, a higher terminal growth rate or a persistent premium multiple. Each route tells us the price is paying today for future excellence, not merely recognizing a good reported year.

Street targets are optimistic and pre-print

The saved target consensus is $1,101.78, with a low of $1,000 and a high of $1,275. That range sits above both the early trade and our base. The latest saved target changes before the print were Deutsche Bank at $1,091 and Bernstein at $1,144 on September 4, and RBC at $1,000 from its July initiation. Dates are part of the evidence because none of those targets incorporates the current release unless the firm issues a new note.

Our value is lower because we require the valuation to work under explicit cash and multiple assumptions. A target above $1,100 can be coherent if Costco sustains mid-teens earnings growth, preserves renewal, expands units without degrading returns, and retains a premium multiple. The target is less robust if required returns rise or cash growth settles near the recent 11.7% record.

Historical one-session reactions show that Costco's stock can move around earnings, but a close-to-close return does not establish that the release alone caused the move. Macro news, rates and market positioning also act during the session. We compute the next regular-session close versus the release-day close because Costco reports after market. The current print is excluded until a full session closes.

The saved earnings calendar lists a $6.54 EPS estimate and a $6.75 actual. Normalized EPS of $6.60 still exceeds that estimate. The same feed's revenue field is unsafe for surprise analysis because its actual is the net-sales line. We keep the EPS comparison with the special-item qualification and leave revenue surprise unscored.

Management decisions preserve the member proposition

Management's most consequential choice in this quarter was not a forecast; it was how to treat the tariff refund. Costco says the benefit was reduced by partial reinvestment in member values. Exhibit 99.2 gives examples of lower everyday prices and new Kirkland Signature items. Reinvesting a windfall can strengthen trust, traffic and renewal, but the financial return will appear through future member behavior rather than a separate asset.

The company also continued expanding access. Third-party same-day channels broaden reach, while personalization improves product placement and email relevance. Those initiatives can increase frequency and convenience. They can also raise fulfillment and technology costs. The public supplement gives growth categories and actions, not a digital contribution margin. Management should be judged on whether digital growth supports member economics without eroding the low-cost operating model.

Warehouse expansion remains disciplined in scale. FY2026 ended with 939 warehouses after 25 net additions. The FY2027 estimate is 967, implying 28 net additions. That is meaningful capital investment but only about 3% unit growth. Comparable sales, member growth and productivity at existing sites therefore remain more important to the near-term profit algorithm than sheer square-foot expansion.

Capital allocation stayed conservative relative to cash generation. Repurchases and regular dividends consumed less than FY free cash flow, and cash accumulated. A large cash position can support openings, technology, resilience and shareholder distributions. We do not assign value to a special dividend that has not been declared. The dated January 2027 repurchase-program expiry should be monitored because a refreshed authorization would update management's capital-return capacity.

What can break the premium

The first risk is valuation compression. Even if EPS reaches the saved FY2027 consensus of $22.66, a 30-times multiple would value the stock near $680 before any separate cash adjustment, far below the current price. Multiples can change because of rates, risk appetite or slower growth without an operational crisis. The premium is part of the thesis, not a stable law.

The second risk is member-economics deceleration. Renewal rates are high but not immovable. Online-acquired members may renew differently, and consumers can react to fee increases, service changes or weaker value perception. Membership income is only a small fraction of total revenue but an important contributor to operating economics and trust. A small renewal decline can matter more than its first-year revenue effect suggests.

The third risk is merchandising and cost pressure. Costco intentionally operates at thin merchandise margins. Wage inflation, healthcare, card fees, shrink, freight, tariffs, LIFO effects or supplier terms can move basis points that become large dollars. Gasoline price changes also distort reported expense ratios. A reported margin decline must be decomposed before it is blamed on execution, but the economic cost can still be real.

The fourth risk is capital intensity. Twenty-eight planned net openings, digital investment and warehouse upgrades require cash. FY2026 capital spending was $6.435 billion. If new locations mature more slowly or cannibalize nearby warehouses, revenue growth can outpace incremental returns. The balance sheet offers protection, but cash invested at a low return is not surplus value.

The fifth risk is concentration and execution at scale. The U.S. produces most sales; international operations add currency and regulatory exposure. Technology systems, privacy, product safety, labor relations and supply continuity are material across 939 warehouses and digital channels. The valuation assumes that Costco can remain culturally disciplined while becoming larger. That is possible and difficult.

What would make the premium work

The most useful catalyst is evidence, not a headline. Paid membership growth above 3.5%, stable renewal and adjusted comparable sales above 6% would show the flywheel remaining healthy after the fee increase matures. If membership income continues growing near the current rate without a new fee step, the quality of the recurring revenue stream improves.

A second catalyst is cash growth that closes the market-implied gap. FY2026 free cash flow reached $9.390 billion. Sustained mid-teens growth would begin to support the current price under a cash model. Growth produced by working-capital timing alone is less convincing than growth from recurring profit plus disciplined investment. We will read cash, capex and warehouse progress together.

A third catalyst is margin proof. Non-gas gross margin improved this quarter, and core-on-core sales margin increased 18 basis points after the tariff normalization. Repeating that improvement without another special item would show that merchandising, mix and ancillary businesses are compounding. Sustained expense discipline would help preserve that benefit; this quarter, ex-gas SG&A improved two basis points, from central costs.

A fourth catalyst is price. The business does not need to deteriorate for the expected return to improve; the purchase price can change. A 15% margin of safety to the $850 base is $722.50. That is a research threshold, not a prediction or automatic buy order. Conversely, an increase above $1,000 without a proportional rise in cash earnings would widen the required-growth gap.

Methods, history and disclosure boundaries

Costco uses a 52/53-week fiscal year ending on the Sunday nearest the end of August. The first three quarters generally contain twelve weeks and the fourth contains sixteen, or seventeen in a 53-week year. FY2023 had 53 weeks; FY2024, FY2025 and FY2026 had 52. The 11.7% cash-flow CAGR uses reported fiscal-year totals without a weekly normalization. Sequential quarter comparisons without adjusting for weeks are misleading. The nine-quarter table preserves each reported fiscal label and source URL. It includes provider-structured fields crosschecked to the archived earnings releases; the current quarter is entered from Exhibit 99.1.

The company is a Washington corporation whose common stock trades on the Nasdaq Global Select Market under COST. KPMG LLP has served as auditor since 2002. FY2025 employment was 341,000, with approximately 95% in warehouses and distribution channels and around 5% represented by unions. Preferred stock is authorized but none was outstanding at the FY2026 balance date. This is a domestic common-stock issuer, not an ADS or VIE listing.

Costco recognized membership revenue ratably over the one-year membership period. Deferred fees are a liability until service is delivered. Executive rewards reduce sales, subject to estimated non-redemption. Gasoline, foreign exchange and LIFO can alter reported comparisons. The packet uses issuer-adjusted comparable sales only where the release supplies them and labels the adjustment.

Valuation outputs are computed, not sourced forecasts. Consensus inputs are dated provider observations. The cash model assumes normalized owner cash flow, explicit growth, a discount rate and terminal growth. The reverse model solves for the five-year growth rate required by the market enterprise value under the same discount and terminal assumptions. Scenario probabilities are judgments, not frequencies.

The principal limitation is timing. FY2026 10-K was not filed at this print. Exhibit 99.1 supplies unaudited year-end statements, and Exhibit 99.2 supplies operating detail. The current price is an early after-hours trade. No completed post-print regular session exists. Costco provides no earnings guidance. Those limitations are part of the conclusion rather than blanks filled with estimates.

Formula register. Normalized Q4 EPS = $6.75 − $0.15. Net cash = cash + short-term investments − current debt − long-term debt. Free cash flow = operating cash flow − capital expenditures. Base return = $850 / $897.02 − 1. Historical print reaction = next regular-session close / release-date regular close − 1 for an after-market report. No formula substitutes for reading the source definition.