Analysis
Costco Wholesale Corporation (COST) has navigated a complex and fluid tariff environment following the introduction of reciprocal duties in April 2025. Approximately one-third of the company's U.S. sales are imported, with management noting that items from China, Mexico, and Canada represent roughly half of that import exposure. This high import penetration initially caused direct inflationary pressure, particularly in fresh items sourced from Central and South America during the third quarter of fiscal 2025 (3Q-2025 Earnings Call Summary).
In response, Costco utilized its "treasure hunt" model to maintain merchandising flexibility, opting to absorb a portion of the increased costs rather than passing them entirely to members. This strategic choice to remain the "pricing authority" contributed to a modest 8-basis point decline in core-on-core gross margins in the second quarter of fiscal 2025 (Transcript 2Q-2025). Mitigation efforts focused on aggressive sourcing shifts, including moving production to the U.S. or other less-affected regions, consolidating global buying power, and increasing the penetration of Kirkland Signature (KS) private-label products, where the company has greater supply chain control (Transcript 2Q-2026).
A significant operational shift occurred in February 2026, when the Supreme Court ruled that many of the tariffs introduced in 2025 were unlawful. Following this ruling, Costco began a legal pursuit for refunds of duties paid, with third-party estimates suggesting the potential recovery could exceed $1 billion (LinkedIn 2026). As certain tariffs were reduced or eliminated, the company started lowering prices for members on previously affected items, including textiles, bedding, and cookware (Transcript 2Q-2026).
Despite the court victory, the tariff landscape remains volatile. Management noted in March 2026 that recently eliminated duties have been replaced by new global tariffs scheduled for at least the next 150 days. The company continues to adjust its assortment to minimize exposure, such as reducing the number of imported stock-keeping units (SKUs) in high-volume holiday categories in favor of U.S.-sourced alternatives (Transcript 1Q-2026). Financial results for the second quarter of fiscal 2026 indicate successful mitigation, with gross margins improving 5 basis points (excluding non-recurring items) even while managing ongoing tariff impacts (Transcript 2Q-2026).
Data
Tariff Exposure and Impact Summary
($B, except basis point data)
| Metric | Value / Impact | Period |
|---|---|---|
| Total U.S. Import Exposure | ~$80.0 – $90.0 | FY2025 |
| Core-on-Core Margin Impact | (8 bps) | 2Q2025 |
| Non-Food Category Inflation | Low-single digit | 1Q2026 |
| Estimated Tariff Duties Paid | $1.0+ | FY2025 |
| Adjusted Gross Margin Change* | 5 bps | 2Q2026 |
*Excludes 6bps non-recurring legal settlement.
Source: Company filings, Marvin Labs
Financial Impact
- Cost Impact (Historic): $1.0B–$2.0B
- Cost Impact (Forward-Looking): $800M–$1.5B
Sources
The future impact of tariffs remains extremely fluid, as the recently eliminated IEEPA tariffs have now been replaced with new global tariffs for at least the next 150 days.
As we say, when it rains, it rains on everyone, such as a tariff that we're all equal there... Our people are nimble, and they're ready to go at it if they need to.
In many cases, we didn't pass the full cost [of tariffs] on to our members. The complexity of the tariffs implemented over the past year... also made it challenging to track the exact impact to an individual item sold.