Costco Earnings: Why One-Time Gains Need a Second Look

Costco Wholesale reported another strong quarter last week. Fiscal fourth-quarter net sales increased 11.2% to $93.9 billion, net income reached almost $3.0 billion and diluted earnings per share rose from $5.87 to $6.75. At first glance, there is not much ambiguity in those numbers. Revenue increased, profit increased and earnings per share increased faster than sales.

There is one detail worth separating from the rest of the result. Costco explicitly said that quarterly earnings benefited by $0.15 per diluted share from non-recurring IEEPA tariff refunds, after accounting for the portion it reinvested in increased member value. That benefit was real. It belonged in reported earnings. It also should not automatically be treated as part of Costco's normal earning power.

This is a small adjustment in Costco's case, which is exactly what makes it a useful example. Normalizing earnings is not only something investors should do when a company reports an enormous impairment, restructuring charge or asset-sale gain. Even relatively modest one-time items can help illustrate the difference between what a company earned during an accounting period and what the underlying business appears capable of producing repeatedly.

Reported earnings are the starting point

Costco's fiscal Q4 results show diluted EPS of $6.75 compared with $5.87 in the prior-year quarter. Net income increased to $2.998 billion from $2.610 billion, while operating income increased to $3.801 billion from $3.341 billion.

Those are the reported figures and they should not be rewritten merely because one component was unusual. Financial statements describe what actually happened. If Costco legally received tariff refunds during the period, the economic benefit belongs somewhere in the accounts.

The analytical step comes afterwards. Investors trying to estimate sustainable earning power have a slightly different objective from accountants preparing the historical statements. They want to understand how much of the latest result is likely to be repeatable.

Costco already did much of the work for investors by identifying the tariff-refund effect as non-recurring. A simple first-pass adjustment would therefore subtract the identified $0.15 from the reported $6.75, leaving roughly $6.60 of quarterly EPS. That is not intended as a complete alternative earnings model. It simply isolates the specific item management itself identified as unusual.

The conclusion is important: Costco still produced substantially more earnings than the $5.87 reported in the comparable quarter a year earlier. Removing the one-time benefit changes the magnitude slightly. It does not reverse the underlying direction.

Normalization should clarify the business, not manufacture a better number

Adjusted earnings can become dangerous when investors automatically remove everything unpleasant while happily keeping every unusual benefit. Restructuring costs, litigation expenses, acquisition charges and impairments are sometimes described as exceptional even when similar charges appear with surprising regularity.

The purpose of normalization is not to create the highest possible earnings figure. It is to estimate what the economics might look like under reasonably ordinary operating conditions.

That requires judgement. A genuinely isolated legal settlement may tell us little about future earning power. Repeated restructuring expenses probably deserve more skepticism. A temporary tax benefit may not recur, while a permanent change in the tax rate might. Acquisition costs can be unusual for a company that rarely buys businesses and effectively routine for a serial acquirer.

Costco's tariff-refund disclosure is comparatively straightforward because management explicitly called the benefit non-recurring. The company's September 24 SEC filing also makes clear that the $0.15 figure already reflects partial reinvestment of the refunds into additional member value.

That final point matters. Costco did not simply receive an unusual benefit and allow the entire amount to flow to shareholders. Part of it was used to support customer value, which fits the economics of a business built around maintaining a compelling membership proposition.

The rest of the quarter provides the reality check

One way to test whether a one-time item is dominating the earnings story is to examine the surrounding evidence. Costco's underlying operating numbers remained strong. Net sales increased 11.2%, while full-year net sales increased 10.1% to $297.2 billion. Membership-fee revenue reached $1.85 billion during the quarter, up from $1.72 billion a year earlier.

Comparable sales increased 9.4% during the quarter, or 6.7% after excluding the effects of gasoline-price movements and foreign exchange. Digitally enabled comparable sales increased 19.5%, or 19.8% on the company's adjusted basis.

Those figures make it difficult to argue that the earnings improvement depended on the tariff refund alone. The one-time gain helped reported EPS, but the operating business was also producing higher revenue, membership income and operating profit.

This is an important discipline in fundamental analysis. An unusual item should rarely be assessed in isolation. Investors should ask whether revenue, margins, cash generation and other operating evidence support the same general direction as reported earnings.

If reported EPS increases sharply while the underlying business deteriorates, normalization can reveal a problem. If reported EPS contains a modest unusual benefit while the broader economics are also improving, normalization may simply make an already healthy result slightly less spectacular.

MOATEY's longer-term evidence moved in the same direction

The latest MOATEY update provides another way to move beyond the quarterly headline. Following the new financial information, MOATEY's five-year earnings growth measure increased from 11.65% to 13.0%. Its five-year free-cash-flow growth measure rose more substantially from 9.57% to 16.18%, while the revenue growth measure increased from 6.71% to 7.9%.

As a result, the MOATEY Growth assessment increased from 7.4 to 10.3 of 15 available points. The overall Fundamentals assessment also increased from 39.9 to 43.1 points.

These are MOATEY framework measures rather than raw figures taken directly from Costco's financial statements. Values used by MOATEY may be subject to adjustments as part of the company's systematic evaluation and the determination of ratings and classifications. Readers who want to inspect how the broader framework is constructed and tested can review the MOATEY factsheet and supporting documentation.

The interesting part is not that MOATEY found exactly the same growth rate as the latest reported quarter. It should not. A five-year measure is intended to answer a different question. Quarterly EPS describes one period. Longer-term fundamental evidence asks whether the economic development has persisted through time.

In Costco's case, the latest evidence strengthened that longer-term picture too. The non-recurring tariff benefit therefore deserves removal when thinking about sustainable earnings, but removing it does not undermine the broader fundamental trend.

One-time benefits deserve the same skepticism as one-time costs

Investors tend to notice unusual expenses more readily than unusual gains. When earnings fall because of a restructuring charge or impairment, there is an obvious incentive to ask what profit would have looked like without it. When a company reports an unusual gain, the same adjustment can feel less urgent because the resulting number is pleasant.

Analytically, the principle should be symmetrical. If a cost is removed because it is genuinely non-recurring, an unusual gain should receive the same treatment when estimating sustainable profitability.

This discipline matters because valuation is ultimately based on future economics rather than last quarter's accounting total. Capitalizing a temporary benefit into a long-term earnings assumption can make a company appear more profitable than it really is. Ignoring a genuinely temporary expense can produce the opposite error.

The objective is not conservative accounting for its own sake. It is consistency.

A simple way to read the next earnings report

When a company reports results, starting with reported earnings is usually sensible. The next step is to scan for items that management, the auditor or the filing identifies as unusual. Then ask whether the item is genuinely unlikely to recur, whether similar adjustments have appeared before and whether removing it produces a picture consistent with the rest of the business.

The final step is the most important. Reconnect the adjusted number to several years of revenue, earnings and cash-flow development. A quarter can contain noise in either direction. A durable business trend is much harder to manufacture.

Costco's latest result demonstrates the process neatly. Reported EPS was $6.75. A company-identified non-recurring tariff benefit contributed $0.15. Removing it produces a slightly more restrained view of quarterly earning power, but sales, operating income and the longer-term MOATEY evidence were all moving positively as well.

So the lesson is not that Costco's earnings were somehow inflated or misleading. The company disclosed the unusual item clearly. The lesson is that investors should do something with that disclosure.

Reported earnings tell us what happened. Normalized earnings help us think about what might reasonably happen again.