Costco (COST) Options: AI Signals a Potential Call Opportunity

Costco Wholesale Corporation operates membership warehouses and e-commerce sites. Its core business involves offering a limited selection of 'nationally-branded' and 'private-label' products, including 'Kirkland Signature', across various categories like foods, sundries, non-foods, and fresh foods, along with warehouse ancillary services such as gasoline, pharmacy, and optical. Costco also provides other businesses like travel and business centers. The primary target market consists of individual and business members who pay an annual fee for access to these offerings. Costco's strategy focuses on providing members with high-quality merchandise at consistently low prices. They achieve this through volume purchasing, efficient distribution, reduced handling in 'no-frills' warehouses, and rapid inventory turnover, enabling them to operate with lower gross margins than many other retailers.

COST's technical outlook is mildly bearish. The recent price action shows a decline from a high in mid-August, with the price currently trading at $940.81. The stock is below its 50-day SMA ($939.17) which is also below the 200-day SMA ($972.08), confirming the downtrend. The EMA_21 ($929.63) is also below the current price, but trending upwards. Momentum indicators suggest continued weakness; the MACD is negative (-4.86) and trending downward, with the MACD histogram also negative, indicating bearish momentum. The RSI is at 48.36, suggesting neutral momentum, but is trending down. The Stochastic Oscillator (STOCHk at 19.74 and STOCHd at 13.72) indicates that the stock is approaching oversold conditions, which could lead to a short-term bounce. However, the overall trend and momentum remain bearish. The ADX is at 11.36, suggesting a weak trend. Recent price action shows a slight bounce from the most recent low on 2025-10-29, but the overall trend remains down, suggesting further downside potential in the coming 1-3 months.

The company's MD&A presents a generally positive picture. `Net sales` increased by 8% to $61,965 for the three-month period, driven by a 6% increase in comparable sales and contributions from 29 net new warehouses. Membership fee revenue also grew by 10% to $1,240, attributed to new sign-ups and fee increases. The `gross margin` percentage improved by 41 basis points to 11.25%. Excluding the impact of gasoline price deflation, the gross margin percentage increased by 29 basis points to 11.13%. However, SG&A expenses as a percentage of net sales also increased, up 20 basis points to 9.16%. `Net cash provided by operating activities` was $9,468 for the first thirty-six weeks of 2025, compared to $8,381 in the prior year. The company plans to open ten additional new warehouses in the remainder of fiscal 2025 and expects capital expenditures to be slightly over $5,000 for the fiscal year. Renewal rates were 92.7% in the U.S. and Canada and 90.2% worldwide, with some negative impact from digital promotions. Management believes that cash and investment position and operating cash flow will be sufficient to meet liquidity and capital requirements for the foreseeable future.

Costco's Q2 2025 earnings call struck a moderately bullish tone, highlighting strong sales growth and continued membership momentum. Net sales increased 9.1% to $62.53 billion, with total company comparable sales up 6.8% (9.1% adjusted for gas deflation and FX). E-commerce sales showed impressive growth, up 20.9% (22.2% adjusted for FX). Management emphasized that they are 'not really seeing any change' in consumer behavior, noting that members are focused on quality, value, and newness. While core on core margins declined slightly due to supply chain investments and mix changes, the overall gross margin rate increased by four basis points excluding gas deflation. Membership fee income rose 7.4% to $1.193 billion, and renewal rates remained strong at 93% in the US and Canada. Looking ahead, the company plans 28 new warehouse openings in fiscal year 2025. Management acknowledged potential headwinds from foreign exchange and tariffs but expressed confidence in their ability to 'minimize the impact of related cost increases' to members. The new employee agreement is expected to create a mid-single-digit basis point headwind to SG&A.

Costco's financial performance reveals a positive trajectory. Revenue has steadily increased from $57.8B in Q1 2024 to $86.2B in Q4 2025, demonstrating consistent top-line growth. The gross profit ratio remains relatively stable, hovering around 0.125 to 0.130, suggesting consistent profitability. Operating cash flow is strong, with the most recent quarter showing $3.87B in net cash provided by operating activities. Total debt has remained relatively stable, fluctuating slightly between $8.03B and $9.43B, ending at $8.17B in the most recent quarter, indicating a well-managed debt level. Overall, Costco exhibits strong revenue growth, consistent profitability, robust cash flow, and stable debt, painting a picture of financial health and stability.

The company demonstrates a moderately bullish profile, characterized by solid revenue growth and improving profitability. Revenue has consistently increased, indicating strong market demand. The gross margin exhibits stability, suggesting efficient cost management. Return on Equity (ROE) has shown positive movement, signaling enhanced profitability and efficient use of shareholder equity. The Price-to-Earnings (P/E) ratio, while elevated, might be justifiable given the growth trajectory and positive ROE trend. The Debt-to-Equity ratio shows a slight increase, which warrants monitoring, but is counterbalanced by a healthy Current Ratio, implying sufficient liquidity to meet short-term obligations. Overall, the company presents a favorable picture with growth and profitability, though the leverage should be watched closely. The combination of growth and profitability suggests potential for continued positive performance over the next 12 months.