Will Costco's trailing twelve-month gross margin fall below 12.5% by end of FY2026?
Current Prediction
Prediction History
Q2 FY2026 core-on-core gross margin +22bps broad-based widened the buffer; bear case probability reduced from 17% to 10%.
Why This Question Matters
Gross margin has been a positive indicator — expanding 59bps over 3 years from 12.26% to 12.85%. But the current 35bps buffer above the 12.5% escalation threshold is thin given Section 122 tariffs at 10-15%. The Moat Mapper uses gross margin as evidence of improving buying power (cost advantage moat), and compression below 12.5% would reverse the 3-year expansion trend and challenge the 'stable, leaning widening' moat trajectory assessment.
Prediction Distribution
Individual Predictions(5 runs)
Q2 results confirmed gross margin trajectory is positive, not pressured. Core-on-core +22bps in Q2 indicates buying power and category mix improvements offsetting tariff pressure. The 5bps benefit from a non-recurring legal settlement is small — the underlying trend is genuinely positive. With Section 122 likely to expire without replacement (separate market at ~57% expiry-without-replacement), the dominant external pressure on gross margin should ease, not intensify. Reducing from 0.17 prior batch to 0.10. Path to YES requires either a major tariff escalation or a competitive-pricing scenario neither of which is in the visible information set.
Going slightly below the cluster. The 35bps buffer is now effectively wider after Q2's +22bps core-on-core expansion. To compress below 12.5% would require ~50bps of erosion in remaining quarters of FY2026. That would require major tariff escalation OR competitive pricing war OR product mix shift toward lower-margin categories. None observed. Reducing to 0.08.
Aligning with opus run 1. Q2 gross margin trajectory was unambiguously positive. The buffer widened. Path to YES is narrow — major tariff shock or unexpected competitive pricing. Probability ~10%.
Slightly above the cluster on residual considerations: (1) LIFO charge reverted to a $12M cost in Q2 vs prior year credit — suggests cost inflation creeping back in nonfoods/general merchandise; (2) Costco has explicitly stated they 'did not pass the full cost' of tariffs onto members in some cases — implying willingness to absorb margin pressure; (3) the Q3 print falls in the Section 122-still-active window before expiry. These keep some residual probability of margin compression.
Q2 +22bps core-on-core. Buffer widened. Probability falls to ~10%.
Resolution Criteria
Resolves YES if Costco's trailing twelve-month gross margin (net sales minus merchandise costs, divided by net sales) falls below 12.50% as reported in the FY2026 10-K (expected September 2026 filing). Resolves NO if TTM gross margin remains at or above 12.50%.
Resolution Source
Costco 10-K FY2026 income statement — gross profit divided by net sales
Source Trigger
Gross margin compression below 12.5%
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