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For the first time since 1Q22, Costco (COST) missed EPS estimates last night, instigating a profit-taking pullback in a stock that was up by 12% on a year-to-date basis. However, the 2Q25 earnings miss was mainly driven by FX headwinds, which created a $0.13/share headwind. While COST's Canada and international businesses achieved record results on a constant currency basis, negative FX fluctuations caused comps for Canada and international markets to fall short of expectations.

• Considering that the EPS miss wasn't due to weaker-than-expected demand or operational issues, we believe that the stock's selloff is more likely tied to concerns that tariff-induced inflation will result in consumers pulling back on discretionary purchases. COST's more affluent customer base has been a key asset for the warehouse retailer amid this high interest rate and inflationary environment, as illustrated by strength in its non-food categories. 
• On that note, the non-food category generated mid-teens comp growth in Q2, with gold and jewelry, toys, housewares, appliances, sporting goods, home furnishings, and small electronics all posting double digit increases. During the earnings call, CFO Gary Millerchip commented that customers are willing to spend but remain "very choiceful", adding that this dynamic is likely to intensify with the return of some inflation. The possibility of demand tapering off for non-food items is putting some pressure on the stock.
• Following COST's membership fee increase last September, participants have been keeping a close eye on membership fee income growth and signs of customer attrition. For the quarter, membership fee income grew by 7.4% to $1.193 bln, but the membership fee increase only contributed about 3% of the gain. Due to the impact of deferred accounting, most of the benefit from the membership fee increase will materialize over the next four quarters, with the largest contribution coming in 4Q25. Also, in a testament to COST's strong positioning in the retail space and its steady share gains, paid household members were up by nearly 7% and the worldwide renewal rate ticked higher by 10 bps qtr/qtr to 90.5%.
• Lastly, the company is managing expenses well as SG&A as a percentage of revenue improved by 8 bps yr/yr to 9.06%. COST did recently ratify a new employee agreement, though, that will take the average wage for U.S. and Canada employees to over$31/hour. The pay raise comes at a time of increasing uncertainty, which could be creating a little more anxiety for shareholders.

Overall, COST turned in another solid performance with adjusted comps of +9.1% and net income growth of over 8%. The EPS miss is disappointing, but it's a bit misleading since it was driven by FX headwinds. More concerning is the risk that tariffs pose, particularly for COST's non-food categories, but the company does have a track record of performing well during difficult economic conditions.