COST

How will the Navitus-Costco partnership affect Costco’s earnings and stock price?

Created August 06, 2025 at 07:40 PM

Short answer:

The Navitus‑Costco partnership is unlikely to cause a dramatic swing in Costco’s (ticker COST) short‑term earnings or share price, but it should provide a modest, positive contribution to earnings beginning in 2026 and could add a modest “buy‑the‑rumor” boost to the stock in the near‑term. The magnitude of the effect will depend on how quickly the cost‑plus model translates into higher pharmacy margins, higher prescription volumes, and lower drug‑acquisition costs, offset by any implementation and integration costs.

Below is a step‑by‑step breakdown of why the partnership is expected to be positive, but modest, and the key factors that could shape the ultimate impact on Costco’s earnings and stock price.

1. Why the Partnership Could Be Positive for Earnings

Factor	Expected Effect	Why it matters
Cost‑plus pricing reduces drug‑purchase cost	1‑3 % reduction in average pharmacy cost of goods sold (COGS) for prescriptions filled at Costco.	Navitas is a “transparent, pass‑through” PBM that does not add the typical “spread” that traditional PBMs charge. The “cost‑plus” model typically passes the wholesale acquisition cost (UAC) plus a fixed markup (e.g., 10 % + $2) to the payer, so the pharmacy’s cost basis is lower.
Higher pharmacy margin	Roughly +1‑2 % margin improvement on the pharmacy business line.	Costco’s pharmacy margins historically run in the low‑single‑digit percentages (≈ 3–5 % of pharmacy revenue). A 2 % improvement on a $4 billion pharmacy‐related revenue stream (≈ 2 % of Costco’s total revenue) adds roughly $80 million in gross profit before other expenses.
Potential increase in prescription volume	0.5‑2 % incremental volume.	Transparent pricing is a strong differentiator for price‑sensitive shoppers (especially seniors). A modest increase in prescriptions could translate into a few hundred million dollars of additional pharmacy revenue, further enhancing profit.
Cross‑selling / foot‑traffic benefit	Indirectly boosts non‑pharmacy sales.	Pharmacy customers often purchase other high‑margin items (e.g., groceries, electronics). The “pharmacy‑draw” effect can lift overall basket size (estimated +0.1‑0.3 % in same‑store sales).
Cost avoidance from traditional PBM fees	Avoids typical “rebate‑and‑spread” fees (often 3‑6 % of prescription spend).	By eliminating the “hidden” rebates, Costco avoids the “rebate‑reversal” risk that can hurt cash flow when rebates are delayed or disputed.
Risk & integration costs	One‑time spend of $10‑$20 million (IT, contract renegotiation, staff training).	The partnership will require new IT interfaces, data‑exchange layers, and training for pharmacy staff. The cost is modest relative to the revenue scale and should be amortized over several years.
Timeline	Revenue impact starting Jan 1 2026.	The partnership is announced now (Aug 2025), but the cost‑plus pricing model won’t be fully operational until 2026, so the earnings boost will likely be reflected in FY 2027 and later.

Rough, Back‑of‑the‑Envelope Earnings Impact

Metric	Rough estimate
Costco’s FY 2025 net revenue (2024 actual)	≈ $226 B
Pharmacy‑related revenue	≈ 2 % → ~$4.5 B (including retail and mail‑order)
Incremental gross profit from lower COGS	1.5 % × $4.5 B ≈ $68 M
Incremental volume/traffic lift	+0.5 % revenue × $4.5 B = $22.5 M (gross)
Total incremental gross profit	≈ $90‑$100 M before SG&A
Net‑income effect (after SG&A & taxes)	Roughly $60‑$70 M net profit increase (≈ 0.04 % of total net income)
Impact on EPS (FY 2026‑2027)	0.02‑0.04 $ per share (assuming ~2.5 B shares outstanding).
Potential stock‑price reaction (short‑term)	1‑2 % price bump on news; price may drift higher as market digests the long‑term profit upside.

Bottom line: The partnership adds tens of millions of dollars to Costco’s bottom line over the next few years – a small, but positive contribution relative to Costco’s $226 B revenue base. It’s not a “game‑changer,” but it is a clear earnings tailwind that should be reflected in EPS growth in 2026‑2027.

2. How the News May Move the Stock Price

2‑Month “news‑impact” window (August 2025 – October 2025)

Scenario	Expected Reaction	Rationale
Positive market sentiment (most analysts)	+1‑2 % uplift in COST price within a few trading days.	Investors view “transparent cost‑plus” as a sign that Costco will improve margins on a low‑margin segment, while the partnership with a well‑known retailer (Costco) and a pioneering PBM (Navitus) signals strategic execution.
Skepticism about timing and execution	0‑0.5 % change or flat.	Investors may wait for the 2026 implementation date, fearing that the benefits will be delayed and the upside limited.
Long‑term investors (funds, retirees)	Gradual price appreciation over 2026‑2028.	The incremental earnings boost, combined with Costco’s historically strong cash‑flow, dividend, and growth track record, makes the partnership a small but additive catalyst.

Drivers for a Positive Reaction

Industry‑wide pressure for price transparency – The partnership signals Costco’s willingness to meet consumer demand for lower prescription prices, a public‑policy hot topic. This can improve brand perception and attract cost‑conscious shoppers.
Competitive differentiator – Costco already competes on low prices. Adding a transparent pharmacy offering reinforces its “lowest‑price” narrative, potentially stealing business from other pharmacy chains (e.g., CVS, Walgreens).
Investor expectations of improved cash flow – By eliminating typical PBM “rebate” churn, Costco may see less volatility in cash flow from pharmacy operations, which is a plus for analysts modeling free‑cash‑flow models.

Risks that Could Dampen the Stock Reaction

Risk	Potential Effect	Mitigation
Implementation cost overruns	Short‑term EPS drag if integration costs exceed $20 M.	Management can flag costs in 2026‑27 earnings releases and clarify that the cost is a one‑time expense.
Regulatory/Legislative changes	New legislation could limit or alter the cost‑plus model.	Navitus’s “pass‑through” structure is already aligned with most state‑level transparency statutes; less risk than a typical “rebate” model.
Limited scale	Pharmacy revenue is only a few percent of total; the impact might be “noise” for investors focused on grocery and e‑commerce growth.	Use partnership as a proof‑point for expanding “pharmacy‑plus‑other services” (e.g., health‑clinic, telehealth) in future.
Consumer‑price perception	If cost‑plus pricing is seen as “higher” than current Costco pharmacy prices (due to a modest markup) it could reduce volume.	Navitus’s model is designed to keep prices at or below current average retail pharmacy price (UAC + 10 % + $2). Marketing the “no‑hidden‑rebates, transparent price” message can offset concerns.

3. How the Partnership Might Play Out in the Earnings Narrative

2025 (Current year)

- Announcement → press release (Business Wire) → analyst calls: “We’re pleased to see Costco aligning with a transparent PBM.”

- Analyst consensus: Slight uptick in EPS forecasts for FY 2026‑2027 (0‑2 cents).

2026

- Implementation (Jan 1 2026) → “Cost‑plus” model goes live in Costco pharmacy.

- Quarterly impact: incremental pharmacy gross margin improvement shows in Q1‑Q4 2026 results.

- Management commentary: “Cost‑plus pricing has driven a 1‑2 % lift in pharmacy margins, and pharmacy traffic is up 0.7 %.”

- Stock: small incremental upside (1‑3 %) as earnings beat modest expectations.

2027‑2028

- Scale: Navitus extends cost‑plus model to mail‑order; potential “national” rollout to all Costco pharmacies (if the initial pilot is successful).

- Earnings: cumulative $50‑$80 M net earnings contribution per year, ~0.04 $ EPS per year.

- Stock: incremental upward drift; the partnership becomes a “plus‑point” in the long‑term growth narrative, especially for “low‑cost health services” initiatives.

4. Bottom‑Line Takeaways for Investors

Magnitude: Expect a low‑double‑digit‑million-dollar earnings boost, not a transformation of Costco’s profit profile.
Timing: Benefits won’t appear until 2026 (the partnership is announced now, but the cost‑plus pricing goes live in 2026).
Stock price impact: Short‑term (next 30‑90 days) → modest 1‑2 % price bump; long‑term (2026‑2028) → ** incremental EPS growth** that contributes positively to the long‑term shareholder return.
Risk/Reward: Low‑to‑moderate risk (implementation costs, modest scale) vs moderate upside (margin improvement, volume uplift, brand‑image boost). Overall, a positive but cautious catalyst for Costco’s earnings outlook.

Final Verdict: The Navitus‑Costco partnership should incrementally improve Costco’s earnings through lower drug‑acquisition costs and a modest increase in prescription volume. The effect on the stock price will be positive but modest, likely delivering a modest bump in the near term and a modest but measurable contribution to earnings and EPS starting in 2026. Investors should view it as a supporting catalyst to Costco’s already strong, low‑cost, high‑volume business model, rather than a major growth driver.