Deep dive: Why Costco’s Q2 pleased investors despite an earnings miss

Costco Wholesale Corp (NASDAQ: COST) is in focus this morning after coming in shy of earnings estimates for its fiscal second quarter.

But there was hardly anything in its earnings release that should prove to be a back-breaker for investors, according to famed investor Jim Cramer.

The retail giant earned $4.02 a share in its recently concluded quarter versus analysts at $4.11.

However, much of that weakness was related only to currency headwinds.

Investors could still take heart in the fact that Costco improved its EPS by 2.6% even though its year-ago quarter included a little under $100 million worth of tax benefit.

Why is Jim Cramer bullish on Costco stock?

Cramer remains positive on Costco despite the earnings miss as it’s “the best-run retailer in the world,” he told members of his Investing Club on Friday.

The retailer offers a collection of assortments that may not be as extensive as the one you can find at a Walmart, but it sells it at a price that’s super hard to beat.

It’s a strategy that could particularly shine now that Trump tariffs are threatening a resurgence in inflation and pressure on the US economy.

As the price-sensitive consumer looks for budget-friendly avenues for shopping amidst the new macro environment, it’s reasonable to believe that a Costco will become their go-to destination.

How will COST navigate Trump tariffs?

Ron Vachris, the chief executive of Costco, reassured investors on the earnings call last night that his company is strongly positioned to navigate the new tariffs.

The retail behemoth, he confirmed, is open to replacing items that may be slapped with aggressive tariffs with alternatives that will be less exposed to the new levies.

On the call, the Nasdaq-listed firm also revealed no change so far in member behavior in the wake of Trump tariffs.

Traffic to its stores was up 5.7% year-on-year in the second financial quarter.

Plus, a dividend yield of 0.45% tied to Costco stock at writing makes it a bit more attractive to own for the long-term as well.

Is it worth buying Costco shares today?

Jim Cramer agreed that Costco shares are not inexpensive to own at 55 times forward earnings, but cited eight consecutive quarters of operating margin expansion, better-than-expected comps, and a sequential increase in membership renewal rates for keeping bullish.

The retail giant ended its Q2 with a total of 78.4 million paid memberships – a 6.8% increase versus the same quarter last year but down about 300,000 versus Street expectations.  

But Costco opened only one store in the second quarter but has plans of opening a few more in the coming weeks.

Once it does, the membership number will improve as well, argued the former hedge fund manager.  

Note that Costco is growing its advertising business as well, revenue from which will be reinvested in the business to keep prices low, according to its chief of finance, Gary Millerchip.

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