Costco’s Trump Lawsuit and Q1 2026 Earnings: What Investors Need to Watch

The December 11 Costco (COST:US) earnings call will be more than a routine financial update. It will mark Costco’s first comprehensive public explanation of why it chose to challenge the administration’s trade policy directly, what it stands to gain financially, and how it intends to manage any fallout. Let’s take a closer look:

A Legal Fight That Breaks Corporate Tradition

Costco’s decision to sue the Trump administration just days before its Q1 2026 earnings call pushes the retailer into territory most large corporations typically avoid: a direct legal confrontation with the White House. The lawsuit heightens the stakes of the upcoming earnings discussion and sets the stage for one of the most politically charged calls in the company’s history.

Filed in early December with the US Court of International Trade in Manhattan, the lawsuit seeks to secure refunds in the event the Supreme Court rules that President Trump exceeded his authority when imposing broad and steep tariffs under the International Emergency Economic Powers Act. These tariffs climbed to 50% for certain trading partners and reached 145% for Chinese goods at some point in 2025, contributing to a total cost of nearly $90 billion for US importers by late September.

Costco never publicly disclosed its exact tariff exposure, but even a modest share of that figure is financially meaningful for a retailer generating $275.2 billion in annual revenue while operating on thin margins. What makes the move “extraordinary” is that Costco stands alone among major retailers in challenging the administration so directly; other large competitors have remained silent while dozens of smaller firms quietly filed protective claims.

Why Costco Filed the Lawsuit Now

The timing reflects intensifying legal uncertainty. The Supreme Court heard arguments on November 5, and justices from across the ideological spectrum raised doubts about whether the emergency powers law justified such sweeping tariffs.

Costco argues that the government’s use of the law created significant ambiguity about whether companies could reclaim payments if the policy is struck down. It also claimed that Customs and Border Protection repeatedly denied deadline extensions needed to finalise tariff payments, leaving the company no practical alternative to litigation.

The White House quickly positioned the lawsuit as a challenge not only to the tariffs but to the administration itself. A spokesperson told CNN that the case shows the economic risks of failing to defend Trump’s lawful tariffs, emphasising the administration’s stance that the measures were justified. This creates an unusual layer of political risk for Costco at a time when corporate–government relations are already strained.

For the retailer, the core issue is straightforward: if the Supreme Court invalidates the tariffs and there is no clear refund mechanism, Costco could still be stuck absorbing payments it argues were unlawfully imposed. Given its low pricing strategy and roughly 11% merchandise margins, unrecoverable tariffs could create lasting profitability pressure.

What the December 11 Earnings Call Must Address

The Q1 fiscal 2026 earnings call will now function as Costco’s first public platform to explain its legal strategy, quantify the financial stakes, and react to concerns about possible political retaliation. While the quarterly numbers will matter, investors will be far more focused on what management says about the lawsuit.

The financial backdrop remains strong. In Q4 2025, Costco reported $86.16 billion in net sales, $2.61 billion in net income, and $5.87 per share. Comparable sales increased 5.7%, and e-commerce grew 13.5%. Membership fee income rose around 14% following the September 2024 fee increase, and its positive impact will continue to build as renewals cycle through.

But none of these solid results diminishes the importance of clarity around the tariff issue. In September, CFO Gary Millerchip described a mix of efficiency gains, cost absorption, and sourcing shifts as Costco’s strategy for managing tariffs. With the lawsuit now public, the market expects more transparency. Key questions include the size of the disputed tariff amount, the likely timeline for a Supreme Court decision, whether other large retailers may follow Costco’s lead, and how the company intends to navigate any political or regulatory pushback.

Margins Under Threat

Investors remain focused on Costco’s ability to protect its profit margins. Q4 highlighted inflationary pressures, evidenced by a $43 million LIFO charge that contrasts sharply with the prior year’s $8 million credit. With non-food inflation persisting due to import costs, potential tariffs pose a further threat to profitability unless mitigated by strategic sourcing or pricing adjustments. Analysts expect $67.15 billion in revenue and $4.24 in earnings per share for Q1 FY26, but management’s comments on margin protection are likely to matter more than whether it meets estimates.

Kirkland Signature’s Expanding Role

The private-label Kirkland Signature brand remains one of Costco’s most effective tools against tariff pressures. Management said margins improved by 29 basis points in Q4 due partly to increased Kirkland penetration and supply chain efficiencies. Investors will watch closely for signs that Costco plans to accelerate Kirkland expansion in categories facing the highest tariff burdens. The development of new Kirkland items replacing tariff-impacted national brands, and consumer acceptance of these alternatives, will signal how far Costco is willing to push this strategy in 2026.

E-Commerce as a Strategic Buffer

E-commerce growth of more than 15% in fiscal 2025 gives Costco a channel with strategic flexibility. The online business allows faster changes to product mix, stronger reliance on domestic sourcing, and greater use of drop-ship models that reduce inventory exposure. With fiscal 2026 off to a strong start online, the company may increasingly lean on e-commerce to offset tariff shocks or supply-chain constraints linked to international sourcing.

The Supply Chain Repositioning Challenge

Costco’s lawsuit describes the tariff landscape as unpredictable and difficult to plan around, suggesting the company is still working through supply chain adjustments. Investors will want updates on how much inventory remains sourced from China, the progress of diversification into alternative countries, and any capital spending tied to long-term sourcing shifts. These signals will show whether Costco can structurally reduce tariff exposure rather than relying solely on operational tweaks.

Risks & Strengths Heading Into 2026

Several external risks could influence Costco’s performance over the coming year. The Supreme Court’s timeline remains fluid, but a decision is expected in early 2026. Until then, Costco must continue paying contested tariffs, tying up capital while consumer behaviour softens.

PwC’s Holiday Outlook 2025 suggests consumers plan to spend about 5% less this holiday season and expect further cutbacks in the months ahead. While Costco historically benefits from shoppers seeking value, a broad decline in discretionary spending could weigh on traffic and average basket size.

Competitive pressures also present risk. Sam’s Club still holds a slight edge in physical footprint, and competitors like BJ’s Wholesale and Target may benefit from avoiding political entanglements. If Costco faces political blowback while peers stay neutral, competitive dynamics could temporarily shift.

Despite these challenges, Costco enters 2026 with several structural strengths. Its membership model continues to generate predictable recurring revenue, with renewal rates near 93% in the US and Canada. The membership fee increase will act as a multi-quarter earnings tailwind.

Private-label expansion supports margins while reducing exposure to tariff-heavy national brands. Strong e-commerce growth provides a channel with greater sourcing flexibility. And the plan to open 35 new warehouses in fiscal 2026 shows management’s confidence in long-term demand.

Sources: CNN, Costco, CNBC, U.S. Customs and Border Protection, PwC, Yahoo Finance