Costco's Global Growth vs. Domestic Headwinds: Is the Membership Model Still a Safe Bet?

Amid a backdrop of U.S. consumer caution and escalating trade tensions, Costco Wholesale Corporation (NASDAQ: COST) has delivered a mixed June performance that underscores both its global dominance and vulnerabilities at home. While international markets powered ahead, U.S. traffic growth slowed, and tariff-related pressures loom large. Is this retail giant's resilience enough to justify a buy—or do underlying weaknesses demand caution?

The Divergence: International Strength vs. U.S. Traffic Stagnation

Costco's June sales report reveals a stark divide. International comparable sales surged 10.9% in the five-week period, led by Australia, Mexico, and Taiwan. Canada alone grew 6.7%, while adjusted figures excluding currency swings showed even stronger gains (7.9% in Canada, 8.2% in other international regions). This contrasts sharply with the U.S., where traffic rose just 2.8%—lagging behind the global average—and same-store sales grew only 4.7% (vs. 5.8% company-wide).

The Northeast U.S., a battleground for competitor BJ's Wholesale Club, underperformed, hinting at localized saturation or shifting consumer preferences. Meanwhile, e-commerce sales—up 15.3% year-to-date—are a bright spot, but they account for only a sliver of total revenue.

Tariffs: A Costly Dance of Inventory and Pricing

The real test lies in how Costco navigates escalating tariffs. The company has pulled forward shipments of summer goods to avoid impending rate hikes, rerouted imports to non-U.S. markets, and localized production of private-label items like mattresses and Kirkland Signature water. These moves have kept prices steady—a “last resort” for Costco—even as competitors like Walmart hint at hikes.

But challenges remain. CFO Gary Millerchip noted that one-third of U.S. sales come from imported goods, with China, Mexico, and Canada accounting for nearly half of those. While tariff mitigation strategies have worked so far, prolonged trade wars could force painful choices. Already, Costco has trimmed unprofitable SKUs and hinted at selective price increases for discretionary items like flowers.

Consumer Discretionary Sector: A Rocky Landscape

The broader retail sector faces headwinds. Inflation, FX headwinds (which dragged international sales by 2.1% in Q2), and labor costs (hourly pay now over $31) are squeezing margins. Even as Costco's membership fees rose 10.4% year-over-year—a testament to its sticky customer base—U.S. gas price declines (a 1.3% drag on sales) and regional traffic softness signal caution.

The consumer discretionary sector's struggles are evident: Walmart's Sam's Club reported weaker non-food sales, and Target's inventory missteps continue. Yet Costco's limited SKU model and bulk pricing power provide a buffer. Its $13.8 billion cash pile and minimal debt also give it flexibility to weather volatility.

Risks on the Horizon

• Legal Battles: Lululemon's lawsuit alleging unauthorized Kirkland-branded copies could damage brand trust.
• Valuation: At 38x trailing earnings, COST's premium relies on sustained growth. A U.S. recession or prolonged inflation could test this.
• Member Retention: While renewal rates remain strong (93% in the U.S./Canada), Asia's lower renewal rates—due to digital promotions and new warehouses—require close watch.

Investment Thesis: Buy the Dip, or Wait for Clarity?

Costco's fundamentals remain robust: 8.0% year-to-date sales growth, 5.8% net income growth, and a dividend yield of 0.6% (despite minimal debt) reflect operational excellence. Analysts unanimously rate it a “Buy,” with a $1,065 price target (a 7% upside from current levels).

However, the risks are real. Investors should:
1. Monitor U.S. traffic trends. A sustained deceleration below 3% could signal broader consumer weakness.
2. Track tariff developments. New court rulings or trade deals could shift the cost calculus.
3. Watch for e-commerce momentum. The Warehouse Tool app's 43 million visits are promising, but scalability matters.

Conclusion: A Buy with a Buffer

Costco's global expansion, pricing discipline, and membership moat justify a long-term buy, but with caveats. The stock's premium valuation demands patience—investors should consider averaging into positions on dips. For now, Costco's ability to balance growth and value makes it a top-tier retail play, even as U.S. consumers tread carefully.

Recommendation: Buy COST on pullbacks below $950, with a 12-month target of $1,050. Avoid chasing the stock above $1,020 until U.S. traffic stabilizes.

Data as of July 6, 2025. Past performance does not guarantee future results.