Costco Wholesale (NASDAQ:COST) saw its shares decline 1.8% to $939.49 in late-morning trading on Thursday, as a newly announced Medicare pilot program added fresh scrutiny to the retailer's premium valuation. The stock, which trades at 47.2 times earnings, now faces questions about whether the initiative can generate enough incremental growth to justify its rich multiple.
The pilot, developed in partnership with SCAN Group, a nonprofit Medicare insurer, aims to offer Medicare Advantage and Medicare Supplement coverage through in-store, online, and agent-based channels. Pending regulatory approval, the program will operate in two states for Medicare Advantage and one state for Medicare Supplement, targeting markets with an estimated five million eligible individuals. Costco's membership base of 82.9 million paid households, including 41.2 million Executive members, provides a substantial distribution network for the initiative.
However, U.S. regulations prohibit Costco from tying coverage to a paid membership, limiting the direct financial upside. Instead, the company anticipates indirect benefits from increased utilization of its pharmacy, optical, hearing, food, and over-the-counter offerings. Financial terms of the partnership were not disclosed.
Costco's CEO Ron Vachris emphasized the strategic rationale, stating, "Selecting SCAN as our partner to deliver a better healthcare experience for seniors is an extension of that commitment." The move aligns with Costco's efforts to diversify beyond its core warehouse retail model and tap into the growing healthcare sector.
The company's recent financial performance underscores its solid foundation. In the fiscal third quarter ended May 10, net sales rose 11.6% to $69.15 billion, while net income increased 15.2% to $2.19 billion. Diluted EPS climbed 15.2% to $4.93, and membership fees advanced 10.7% to $1.37 billion. July net sales grew 10.7% to $23.12 billion, with digital sales surging 18.2% on an adjusted basis. However, gross margin contracted by 21 basis points to 11.04%, highlighting the operational challenges facing the company.
Wall Street's reaction to the Medicare pilot is mixed. Bernstein analyst Zhihan Ma maintains a Buy rating with a $1,194 price target, citing ongoing resilience in membership and sales. RBC Capital holds a Sector Perform rating with a $1,000 target, while Roth Capital is more cautious, issuing a Sell rating with a $781 target due to valuation concerns. The consensus rating is Buy, with an average target of $1,077, implying a 14.6% upside from the current price.
The pilot's potential impact on SCAN is significant. If just 1% of the five million eligible individuals enroll, it would add 50,000 new plan members, representing roughly 11% of SCAN's existing 460,000 membership. This illustrates the scale of opportunity, though the direct financial benefit to Costco remains unclear.
Peer comparison shows Costco's relative strength. While Walmart (WMT) plunged 9.4% and Amazon (AMZN) dropped 2.0% on Thursday, Costco's decline was more modest, indicating investor confidence in its defensive qualities. The stock sits 14.3% below its 52-week high of $1,096.50 but remains 11.3% above its low of $844.06.
For investors, the key catalysts to watch are regulatory approval, state enrollment figures, and any economic disclosures from the partnership. August sales data and the upcoming earnings report will also provide clues on whether digital expansion can offset margin pressures. A slowdown in comparable sales could further erode confidence in the 47-times multiple, while successful execution of the Medicare initiative could justify the premium valuation.
