Costco CFO sounds alarm on consumer trend | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

Inflation in 2021 rose as Americans found themselves flush with stimulus funds at a time when supply chains were backlogged.

And while annual inflation isn’t nearly as elevated today as it was a few years ago, the effects of price increases linger.

In January, U.S. consumer spending fell for the first time in nearly two years. And as of late 2024, more than a third (35%) of consumers rated U.S. economic conditions as poor, according to Ibotta.

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Worse yet, 70% of consumers say inflation has hurt their household finances.

And compounding matters is that interest rates remain stubbornly high due to sticky inflation. In January the Federal Reserve hit pause on interest rate cuts. And it’s likely to hold rates steady when it meets in mid-March.

Consumers have pulled back on spending in response to higher prices and borrowing costs. And recent indicators don’t bode particularly well for retailers, many of which have been struggling to stay afloat.

Costco CFO warns about new consumer trend.

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Store closures and bankruptcies batter retail

In 2024 more than 7,300 stores closed their doors for good, according to Coresight. And a number of major retailers had no choice but to file for bankruptcy.

Mall staple Express filed for bankruptcy in April following a series of poor merchandising decisions.

Discount retailer Big Lots filed for bankruptcy in September, citing inflation and interest rates as drivers. The company also lost business as a shift to online shopping was fueled by the pandemic.

Party City filed for bankruptcy in December, marking its second Chapter 11 in less than two years. The company immediately began liquidating its inventory and is shuttering 700 stores.

And Coresight expects another 15,000 stores from other companies to close in 2025.

But as a record number of stores are shuttering, Costco Wholesale (COST) is making plans to expand its footprint. During its most-recent earnings call the membership-based warehouse club confirmed plans to open 28 new locations during fiscal 2025. Three of those are relocations, so Costco expects 25 net new buildings.

But the news out of Costco isn’t all good.

Costco issues warning about consumer spending

Costco has long proved resilient in the face of consumer pullbacks, eating its wholesale costs to keep prices low for members. But the company reported mixed results for its fiscal second quarter.

Adjusted earnings per share came in at $4.02, missing projections. Revenue of $63.72 billion beat expectations.

Costco also reported membership-fee revenue of $1.19 billion, a 7.4% increase year over year. Memberships are a core revenue stream for Costco. The Issaquah, Wash., company raised its membership fees in September 2024 after keeping them steady for more than seven years.

But while Costco’s reported numbers were far from bleak, CFO Gary Millership had some concerning words about the state of consumer spending.

“We believe that the member is probably as much focused now on quality, value and newness as they have been for quite some time,” he began.

“They are still showing that willingness to spend, but they’re being very choiceful where they’re spending their dollars. And we think that’s likely to continue and maybe even become more choiceful as the impact of some return of inflation and the potential impact of tariffs could flow through as well.”

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Consumers were already reducing discretionary purchases and spending more mindfully before the Trump administration’s tariffs entered the mix. Given the uncertainty about their impact, consumers might, in the coming months, become even more careful with how they spend.

The Conference Board’s Consumer Confidence Index took a seven-point dive in February, fueled largely by persistent inflation and the expected impact of tariffs.

Costco Chief Executive Ron Vachris noted the possibility of tariff-related shakeups but assured stakeholders that Costco is equipped to withstand them.

“It is difficult to predict the impact of tariffs, but our team remains agile,” he said. “And our goal will be to minimize the impact of related cost increases to our members.”

But traditional retailers might not be as well-equipped to shield consumers from tariff-related impacts in the absence of a revenue stream akin to Costco’s membership fees.

And if they’re forced to raise prices, it could fuel a notable drop in sales and kick off an explosive series of closures and bankruptcies.

Costco closed down 6.1% on Friday to $964.31. Costco had been one of the market’s hottest stocks this year, reaching as high as $1,076.23 on Feb. 12. They are still up 5.2% for the year.

Maurie Backman owns shares of Costco.