Unusual deep in the money option block trades activity on $COST costco before it's earning on 3/6/2025
6min read Costco Wholesale Corporation (NASDAQ: COST) is set to report its second-quarter fiscal 2025 earnings on Thursday, March 6, after market close. This report comes amid significant options market activity and newly implemented tariffs that could impact the retailer's operations and outlook. Costco has demonstrated remarkable resilience in recent quarters, with consistent sales growth and strong membership renewal rates positioning the company favorably despite economic uncertainties.
Option Trades Summary:
On 3/5/2025
- Total Contracts Traded: ~2,100
- Notional Value: Approximately $220 million in underlying shares controlled
- Key Strikes: $490 - $600 (Current stock price ~$1,040)
- Expiration Date: March 7, 2025 (two days out)
- Notable Strike Activity:
- $490 strike: 50 contracts (~$2.7M premium), zero prior open interest (OI).
- $500 strike: 125 contracts (~$6.8M premium), OI was 81.
- $540 strike: 200 contracts (~$10M premium), very low prior OI (11).
- $560 strike: 175 contracts (~$8.4M premium), zero prior OI.
- $600 strike: 100 contracts (~$4.4M premium), minimal prior OI.
These trades represented approximately $220 million in controlled underlying equity, with premium totals around tens of millions of dollars.
Earnings Expectations and Recent Performance
Analysts anticipate Costco to report second-quarter earnings per share of approximately \$4.10, representing a 5% increase from \$3.92 in the same period last year. Revenue is expected to reach \$63.02 billion, a 7.8% increase year-over-year. These projections reflect continued confidence in Costco's business model despite broader economic challenges.
Costco has established an impressive track record of consistently exceeding Wall Street's expectations, having surpassed earnings forecasts in each of the trailing six quarters. The company's first quarter of fiscal 2025 demonstrated solid performance with net sales of \$60.99 billion, a 7.5% increase year-over-year. Net income for that period reached \$1.798 billion (\$4.04 per diluted share), compared to \$1.589 billion (\$3.58 per diluted share) in the prior year. This performance was bolstered by comparable sales growth of 7.1% when excluding the impacts of gasoline prices and foreign exchange fluctuations.
January 2025 sales figures provide additional encouragement for investors. Costco reported net sales of \$19.51 billion for the month, marking a substantial 9.2% increase compared to January 2024. Company-wide comparable store sales increased impressively by 9.8% during this period, with particularly strong growth in the United States at 9.2%. These robust figures suggest continued momentum heading into the earnings announcement.
Options Market Activity Signals Mixed Expectations
The options market has displayed significant activity ahead of Costco's earnings report, reflecting both institutional positioning and speculative trading. Analysis of recent options transactions reveals complex market sentiments about the company's short-term prospects.
On February 26, 2025, market watchers identified 28 notable trades, with 28% demonstrating bullish expectations and 46% indicating bearish sentiment. These transactions comprised 6 puts valued at \$266,594 and 22 calls totaling \$1,025,253. The larger allocation toward call options despite more bearish sentiment percentages presents an interesting contradiction that may reflect hedging strategies rather than directional bets.
Earlier in February, additional unusual options activity was observed with 19 trades showing a different distribution: 42% bullish and 31% bearish. This earlier activity included 5 puts valued at \$381,261 and 14 calls worth \$1,360,863. The significant capital deployment in these options contracts suggests substantial institutional involvement.
Examining the volume and open interest trends reveals that market participants have been targeting a price range between \$800 and \$1,200 for Costco shares. This wide range indicates uncertainty about post-earnings price movement, which is typical before quarterly reports. The current put-to-call volume ratio stands at approximately 0.53, suggesting more bullish sentiment than bearish in the broader options market.
Some particularly notable trades included a \$96,800 bearish call trade with a \$1,025 strike price expiring on March 14, 2025, and an \$80,400 bearish put trade with a \$900 strike price expiring on June 20, 2025. These specific positions demonstrate how larger investors are positioning themselves for potential volatility following the earnings announcement.
Tariff Impacts and Economic Headwinds
Recent policy developments regarding international trade present significant challenges that Costco will need to address. On March 3, 2025, the Trump administration implemented new tariffs effective March 4, with an additional 25% on all imports from Canada and Mexico, except for Canadian energy resources and minerals which face a 10% tariff instead. Simultaneously, a new Executive Order increased the tariff on all imports from China from 10% to 20%.
These tariffs apply in addition to any other duties, fees, and charges applicable to covered imports and affect products entering consumption, or withdrawn from warehouse for consumption, on or after 12:01 a.m. Eastern Standard Time, March 4, 2025. The sudden implementation of these trade policies creates immediate challenges for retailers with international supply chains.
Costco management has already begun addressing these concerns. During the first-quarter earnings call, CFO Gary Millerchip acknowledged the uncertainty surrounding these policy changes, stating, "There's a lot of uncertainty around the timing and scope of changes, so it makes it difficult for anyone to predict what the impact will be with confidence". However, he also noted that only a "minority" of Costco's overall business involving imported goods would be affected by the import taxes.
The company has outlined a multi-faceted approach to mitigate these tariff impacts. Strategies include pulling forward inventory purchases, working with vendors to mitigate costs, considering alternative sources of goods, and potentially adjusting SKU selections. Millerchip drew on historical perspective, quoting his predecessor Richard Galanti: "when it rains, it rains on everybody," suggesting that while tariffs present challenges, they affect all competitors similarly.
Membership Fee Implementation and Revenue Growth
A critical focus area for investors will be the impact of Costco's membership fee increase, which took effect in September 2024. This upcoming earnings report represents only the second quarter reflecting this price adjustment, making it a key indicator of consumer response and revenue implications.
In the first quarter, membership income rose 7.8% year-over-year, with paid memberships reaching 77.4 million and an impressive global renewal rate of 90.4%. Executives have indicated that the full impact of higher membership fees on margins will likely manifest in the latter half of the fiscal year and into fiscal 2026. This gradual implementation occurs as members renew at different times throughout the year.
The membership model remains fundamental to Costco's business strategy, providing a stable revenue stream while enabling the company to offer competitive pricing. The high renewal rate demonstrates strong customer loyalty and satisfaction, which insulates Costco somewhat from economic fluctuations affecting more traditional retailers.
E-commerce Performance and Digital Strategy
Costco's digital transformation continues to yield positive results, with e-commerce comparable sales surging 13.0% in the first quarter of fiscal 2025. This robust growth was driven by site traffic increasing by 16% and higher average order values. The company's ability to translate its warehouse value proposition to online channels demonstrates adaptability in an increasingly digital retail landscape.
E-commerce success provides Costco with an additional growth avenue beyond physical warehouse expansion. The company operates e-commerce sites in multiple countries, including the United States, Canada, the United Kingdom, Mexico, Korea, Taiwan, Japan, and Australia. This digital presence complements the 897 physical warehouses currently in operation globally.
The continued strength in online sales will be closely monitored in the upcoming earnings report as an indicator of Costco's competitive positioning against pure e-commerce players and omnichannel retailers. Any commentary regarding digital investment plans or technological enhancements will be particularly relevant for evaluating future growth potential.
Warehouse Expansion and International Growth
Physical expansion remains an important growth driver for Costco despite its e-commerce success. The company added six new locations in the first quarter and has outlined plans for approximately 20 more by the end of the fiscal year. These new warehouses will contribute to revenue growth in future quarters as they ramp up operations.
Costco's current footprint includes 617 warehouses in the United States and Puerto Rico, alongside 280 international locations across Canada, Mexico, Japan, the United Kingdom, Korea, Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden. This geographic diversification provides some insulation from regional economic fluctuations and exposure to growing international markets.
Investors will be particularly interested in any updates regarding expansion plans in China, where Costco has experienced strong consumer demand at its existing locations. The performance of recently opened warehouses and the pipeline for future openings will provide insights into the company's long-term growth trajectory.
Analyst Sentiment and Stock Performance
Wall Street maintains a generally favorable view of Costco, with 12 of 18 analysts tracked by Visible Alpha issuing "buy" or equivalent ratings compared to six "hold" ratings. However, their average price target of \$1,063 represents just a modest 1.5% premium over recent trading prices, suggesting limited upside potential in the near term.
Costco's stock has delivered impressive returns for investors, gaining approximately 38% over the past twelve months. The shares reached a new record in mid-February 2025 before pulling back slightly. This strong performance reflects investor confidence in Costco's business model and execution despite broader market volatility.
The stock's valuation remains at a premium to most retailers, reflecting the company's consistent performance and growth prospects. However, this premium valuation also creates heightened expectations for quarterly results, potentially amplifying negative reactions to any disappointments.
Conclusion: Key Factors to Watch
As Costco prepares to report its second-quarter results, several key factors will determine market reaction and future outlook. The impact of recently implemented tariffs on costs and pricing strategies will be closely scrutinized, with particular attention to management's comments on mitigation efforts. The flow-through effect of membership fee increases on revenue and margins will provide insights into pricing power and customer loyalty.
Comparable sales growth, especially in the U.S. market, will indicate Costco's ability to maintain momentum in a challenging retail environment. E-commerce performance will demonstrate the company's digital competitiveness, while international expansion updates will inform long-term growth expectations.
Costco has consistently demonstrated resilience through various economic cycles due to its unique membership model, value proposition, and operational excellence. The upcoming earnings report will reveal whether this resilience continues amid new economic and policy challenges. While tariff headwinds present obstacles, Costco's strong market position and proactive management approach suggest the company remains well-positioned to navigate these challenges successfully.
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