Bank of America Trims Costco Target to $1,095 on Margin Caution

Bank of America has lowered its price target for Costco (COST) to $1,095 from $1,200 while retaining its Buy rating. The adjustment reflects a shift in valuation methodology, with the bank applying a 48-times multiple to fiscal 2027 earnings estimates instead of the previous 53-times. This reduction stems from heightened caution regarding gross margins as supply chain costs increase, a factor that directly impacts the company's bottom line despite strong top-line growth.

Costco shares traded below $900 on Wednesday, marking a 10% decline over the past six months. The stock remains well below its 52-week high of $1,097, indicating that market sentiment has cooled despite recent positive operational metrics. The bank’s revised outlook suggests that while long-term fundamentals remain solid, near-term profitability faces headwinds from rising operational expenses.

Quarterly performance meets consensus expectations

Bank of America projects fourth-quarter adjusted earnings of $6.52 per share, slightly below the consensus estimate of $6.55. This forecast is underpinned by 11.3% sales growth and a 10 basis point compression in gross margin, partially offset by 20 basis points of operating expense leverage. The bank highlights steady momentum in U.S. sales, noting that comparable sales excluding gasoline improved to 7.2% in the fourth quarter from 6.8% in the third.

Costco’s third-quarter results demonstrated this resilience, with comparable sales rising 9.8%, or 6.6% after adjusting for gas price inflation and currency effects. Total net sales reached $69.15 billion, an 11.6% year-over-year increase, while net income climbed 15% to $2.192 billion. These figures confirm that the company’s value-focused strategy continues to drive volume growth, even as margin pressures begin to emerge.

Membership growth and tariff refund opportunities

Membership trends support the bullish case, with the company ending the quarter with 82.9 million paid members, a 4.1% year-over-year increase. Executive memberships grew by 9.6% to 41.2 million, indicating a shift toward higher-value customer segments. Bank of America expects membership growth to settle into a 4% to 5% medium-term range as new Asian warehouse openings slow and digital sign-up rates moderate.

Potential tariff refunds represent another tailwind for the retailer. Costco has begun submitting claims related to IEEPA tariffs and anticipates receiving approved refunds on a rolling basis over the coming months. The bank believes these refunds will provide additional financial flexibility, allowing Costco to maintain competitive pricing without sacrificing margin integrity.

Valuation rationale and dividend potential

The decision to maintain the Buy rating rests on Costco’s strong base of higher-income shoppers and the continued strength of its Kirkland Signature private label brand. Bank of America views the company as a solid long-term holding, suggesting that the recent target cut is a recalibration of near-term expectations rather than a fundamental shift in the business model.

With a projected fourth-quarter cash balance of $20.4 billion, the bank sees room for a special dividend announcement. This liquidity position provides Costco with significant capital flexibility, supporting potential shareholder returns while it navigates the current macroeconomic environment and supply chain cost challenges.