Retail Earnings Beat as Costco, Dollar General Ride Bargain Hunt

Shoppers are still spending, but more carefully

The latest retail earnings show that American consumers are still spending but have grown strict about where the money goes. Discount chains and warehouse clubs are beating Wall Street forecasts. Brands that depend on full-price discretionary purchases are cutting their outlooks. The clearest evidence of how wide the gap has become is that strong earnings beats at value chains are coming with asterisks attached, while a weaker brand like Nike can beat on profit and still see its stock fall.

Spending data points the same way. Bank of America's internal card data showed spending per household up 0.9% from July and 4.5% from a year earlier in August. General merchandise and big-box retailers kept outperforming traditional retailers through the back-to-school season, which the bank read as households actively looking for cheaper alternatives while still spending.6 A separate economic analysis made a similar point about housing: more than half of new homes sold cost under $400,000, up from 46% a year earlier.10 Its author described consumers as resourceful but not immune to higher prices and rates.4

Confidence is weaker than spending. The Conference Board's index fell in September. Consumers' write-in comments mentioned prices, and fuel costs in particular, more than ever before, and average 12-month inflation expectations rose to 6.1%.5

Costco: a clear beat with some caveats

Costco's fiscal fourth quarter, the 16 weeks ending August 30, was the strongest result of the season.12 Revenue reached $95.72 billion, above the LSEG consensus of $94.86 billion.16 Net sales rose 11.2% to $93.9 billion from $84.4 billion.18 Comparable sales grew 9.4% as reported and 6.7% excluding gasoline and currency effects, ahead of the roughly 6.44% analysts expected.18 Digitally enabled comparable sales rose 19.5%.15

The profit figure depends on which source you read. Reuters, using LSEG data, reported adjusted earnings of $6.60 per share against a $6.53 estimate.14 Other outlets reported $6.75, which included a one-time benefit of 15 cents per share from tariff refunds under the International Emergency Economic Powers Act (IEEPA).1813 Zacks put its consensus at $6.48.12 Under any of these figures, Costco beat. But a meaningful part of the profit came from a payment that won't repeat. Some analysts and investors were uneasy about how the beat was achieved, and at least one commentary pointed to membership fee growth that had roughly halved.12

The sales numbers weren't a clean beat everywhere either. One report found net sales slightly below the figure analysts had forecast, even though total revenue, which includes membership fees, came in ahead.15 In my reading, Costco is gaining from the value trend, partly because its below-market gas prices draw in price-sensitive drivers as fuel costs rise.16 Investors, though, are already paying for that strength, and a valuation this high leaves little room for one-time items.

Dollar General: richer shoppers start trading down

Dollar General best shows how the trend now reaches beyond lower-income shoppers. In its fiscal second quarter it earned $2.48 per share on $11.3 billion in revenue, compared with estimates of about $2.00 and $11.19 billion.33 Net sales rose 5.2%. Same-store sales grew 3.5%, made up of 2% more customer visits and a 1.5% larger average purchase.39 The company raised its full-year forecasts for sales, same-store sales and earnings, and plans to buy back up to $700 million of stock.37

The 24% earnings surprise is smaller once tariff refunds are removed. One review found those refunds added 81 basis points of gross margin and 25 cents per share. That puts underlying earnings at about $2.23, a beat of roughly 12% rather than 24%.37 The same review noted that the full-year earnings raise was more than twice the size of the refund, which supports the view that the business is improving and isn't relying only on the refund.37 One overseas report put revenue growth at 0.2%, but that conflicts with the 5.2% in the company's own figures and most other coverage.3639

Who is shopping matters more than the totals. CEO Todd Vasos said the chain again saw strong trade-in from middle- and high-income households, while its core lower-income customers remain financially constrained by inflation and fuel prices.32 Those customers are shopping more often but buying less each time.39 Sales in Dollar General's $1 "Value Valley" section rose more than 16%, far faster than the store overall.36 Vasos later said households earning around $100,000 a year no longer feel like high-income shoppers. The stock fell after those comments, as investors weighed whether new shoppers chasing the lowest prices will hurt basket sizes and margins.35

Dollar Tree told a similar story. Comparable sales of consumables rose 5.8%, against 1.6% for discretionary goods, and its gains skewed toward middle- and high-income households.32

Nike: what happens without a value pitch

Nike shows the other side. In its fiscal first quarter it earned 48 cents per share against a 43-cent consensus, but revenue of $11.21 billion fell 4% and missed the $11.32 billion estimate.21 Gross margin rose 60 basis points to 42.8%.22 Still, Nike now expects full-year revenue to fall by a high-single-digit percentage and adjusted earnings per share of $1.15 to $1.35. It also announced a restructuring program, called Pace, that will include layoffs starting in 2027.21

Coverage disagrees on how to describe the quarter. Some reports called it a revenue miss followed by a guidance cut.27 Others said it met expectations, echoing management's statement that the results were consistent with its own plan.26 The guidance resolves the question. Analysts had reportedly expected full-year revenue to fall about 2%. A high-single-digit decline is far worse, and the shares fell sharply after the report.28 One analysis worked out that the rest of the fiscal year would need to average declines of roughly 9% to 12% to meet the full-year guidance.30

Most of the damage came from Greater China, where revenue fell 26% on a currency-neutral basis.28 But consumer caution is also involved: Nike's gross margin gains were partly offset by bigger discounts.26 Before the report, Bank of America downgraded the stock, citing cautious consumer spending and weak demand for classic lifestyle shoes.23 North America was the only major region to grow, rising 2%.28

Analyst forecasts point to a slowdown

The forecasts for the overall sector suggest the strong quarterly beats will be harder to repeat. LSEG expects third-quarter earnings growth for its U.S. Retail and Restaurant Index to slow to 6.8%, after a 71.7% jump in the second quarter. Revenue growth is projected to fall from 7.8% to 3.6%.3 Five of the 10 consumer-related industries LSEG tracks have turned negative. Household durables are the weakest, with profits expected to fall 7.1%.3 LSEG says the slowdown means retailers will enter the holiday season facing a pickier consumer focused on value.9

Before its report, Nike already had some of the weakest sentiment readings in LSEG's StarMine models: 1 out of 100 for price momentum and 3 out of 100 for analyst estimate revisions.3 Dollar General, by contrast, raised its full-year forecasts.37

Why this matters

Three conclusions follow from this round of results.

First, trading down to cheaper stores no longer describes only struggling households. Bank of America says spending and wage growth have largely converged across income groups.6 Yet middle- and high-income shoppers are still moving their everyday spending to dollar stores.32 When households earning $100,000 shop like budget-constrained ones, the value chains gain a wider customer base, and full-price brands lose sales that are hard to win back.35

Second, analysts and investors should treat the earnings beats with care. Tariff refunds boosted both Costco and Dollar General.1337 Dollar General's management has said it doesn't expect a material refund benefit in the second half.37 Some of this quarter's profit growth will therefore drop out of future comparisons.

Third, fuel prices are the variable to watch. Retailers, analysts and surveyed consumers all cite them.335 Walmart's stock fell 7% in May after it gave a cautious outlook because higher gas prices were squeezing shoppers.1 One later report said Walmart's comparable sales grew at their slowest pace in six years.12

Overall, the reporting points one way. Retailers that win on price are taking market share, and companies that rely on brand strength to charge full price have to show shoppers that their products are worth it. With sector growth expected to slow sharply in the third quarter, the holiday season will test whether bargain-hunting shoppers can keep the sector growing.