1. Company Overview & Business Model

Costco Wholesale Corporation (Costco) operates an international chain of membership-only warehouse clubs. The company’s business model is predicated on a simple yet powerful concept: offering a limited selection of high-quality, nationally branded and private-label products at low prices to drive high sales volume and rapid inventory turnover. This high-velocity model, combined with significant operating efficiencies from bulk purchasing, streamlined distribution, and a no-frills warehouse environment, allows the company to operate profitably at gross margins that are substantially lower than those of traditional retailers.¹

The Membership Flywheel

The cornerstone of Costco’s strategy is its membership model, which creates a self-reinforcing cycle often described as a “flywheel.” The low prices on merchandise serve as the primary incentive for customers to purchase an annual membership. The revenue generated from these membership fees is a stable, high-margin income stream that is integral to the company’s profitability.² This fee income effectively subsidizes the company’s merchandise operations, allowing it to maintain its aggressive pricing strategy.

This structure creates a powerful competitive advantage. The low prices reinforce the value of the membership, driving high member renewal rates and attracting new sign-ups. The large and loyal membership base, in turn, guarantees a high volume of sales. This immense sales volume provides Costco with significant bargaining power over its suppliers, enabling it to negotiate lower costs for its merchandise. These cost savings are then passed back to members in the form of lower prices, which further enhances the value proposition and strengthens the flywheel, attracting and retaining even more members. The company’s ability to often sell its inventory before payment is due to suppliers further underscores its operational efficiency and cash-generating power.²

Revenue Composition

Costco’s revenue is generated through two primary streams: net sales from merchandise and membership fees.

• Net Sales: This is the largest component of revenue and includes sales from core merchandise categories (foods and sundries, non-foods, and fresh foods), ancillary businesses located within the warehouses (such as gasoline stations, pharmacies, optical and hearing aid centers, and food courts), and other business lines like e-commerce and travel services.² In fiscal year 2024, which ended September 1, 2024, Costco generated net sales of $249.6 billion, a 5% increase over the prior year, driven by both new warehouse openings and growth in comparable sales.² Within this, gasoline sales constituted approximately 12% of total net sales, while e-commerce operations accounted for about 7%.²
• Membership Fees: While smaller in absolute terms, membership fees are a critical driver of profitability due to their high-margin nature. In fiscal 2024, membership fee revenue grew by 5% to $4.8 billion.² This revenue is accounted for on a deferred basis and recognized ratably over the one-year membership term.² The stability and predictability of this revenue stream provide a significant cushion to the company’s earnings. In fact, membership fees consistently account for a substantial portion of the company’s operating income, demonstrating their outsized importance to the business model.

Value Proposition & Customer Loyalty

Costco’s primary value proposition is offering high-quality products at the lowest possible prices, a commitment symbolized by its long-standing refusal to raise the price of its $1.50 hot dog and soda combo.³ This unwavering focus on value has cultivated an exceptionally loyal customer base, which is the most critical asset of the company.

This loyalty is quantitatively demonstrated by the company’s consistently high membership renewal rates. At the end of fiscal 2024, the renewal rate stood at an impressive 92.9% in the U.S. and Canada, and 90.5% on a worldwide basis.² The company’s membership base has shown robust growth, with total paid members increasing from 65.8 million in fiscal 2022 to 76.2 million in fiscal 2024. Including all household cardholders, the total number of shoppers reached 136.8 million in 2024.²

The company offers several tiers of membership, including Gold Star for individuals and Business for commercial use. An upgrade to Executive membership, which offers a 2% reward on qualified purchases, has become increasingly popular. In fiscal 2024, Executive members accounted for 73.3% of Costco’s worldwide net sales, indicating that the company’s most engaged customers are driving the majority of its business.²

Global Footprint

Costco operates a vast network of warehouses across several countries. As of September 1, 2024, the company operated 890 warehouses globally. The majority of these are in the United States and Puerto Rico (614 locations), with a significant presence in Canada (108 locations). The remaining 168 warehouses are spread across Mexico, Japan, the United Kingdom, Korea, Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden.²

International operations represent a key growth area, with 31% of the company’s warehouses located outside the U.S..² However, the business remains heavily concentrated in North America. In fiscal 2024, U.S. and Canadian operations combined comprised 86% of net sales and 85% of operating income.² Within the U.S., there is a notable concentration in California, which alone accounted for 27% of U.S. net sales in fiscal 2024.²

The Kirkland Signature™ Moat

A crucial element of Costco’s competitive advantage is its private-label brand, Kirkland Signature. Launched in 1995, the brand is strategically designed to offer products of a quality equal to or greater than national brands but at significantly lower prices.² This strategy serves multiple purposes: it differentiates Costco’s merchandise, enhances its value proposition, and generally yields higher profit margins compared to third-party branded goods.²

The success of Kirkland Signature is rooted in Costco’s masterful use of its supplier relationships. Many Kirkland products are co-branded or manufactured by well-known national brands. For instance, Kirkland Signature coffee has been produced by Starbucks, and its batteries by Duracell.⁴ This symbiotic relationship allows manufacturers to utilize their excess capacity and benefit from Costco’s immense order volumes, while Costco gains access to high-quality products without the associated brand-name marketing costs.⁴

The scale of the Kirkland brand is immense. By 2021, it accounted for 31% of Costco’s total revenue, generating over $59 billion in sales—a figure that surpasses the combined sales of major consumer packaged goods companies like Campbell Soup, Hershey, and Kellogg’s.⁴ In the third quarter of fiscal 2025, management noted that sales of Kirkland Signature items continued to outpace the company’s overall sales growth.⁵ The brand’s reputation for quality and value is a powerful driver of member loyalty and a significant competitive moat.

2. Industry Analysis & Macroeconomic Environment

Costco operates within the warehouse club segment of the broader retail industry. This segment is characterized by a membership-based model, bulk product offerings, and a strong emphasis on value. The industry’s performance is closely tied to macroeconomic conditions and evolving consumer behavior.

Warehouse Club Sector Dynamics

The warehouse club industry is a mature and highly concentrated sector, effectively an oligopoly dominated by three main players: Costco, Sam’s Club (a division of Walmart Inc.), and BJ’s Wholesale Club.⁶ The U.S. market for Warehouse Clubs & Supercenters was estimated at $750.4 billion in 2024 and is projected to reach $771.1 billion in 2025, reflecting steady, albeit moderate, growth.⁷ Globally, the warehouse clubs market is forecast to grow at a compound annual growth rate (CAGR) of approximately 4.6% between 2025 and 2033.⁸

The primary growth drivers for the industry are the increasing consumer demand for convenience and cost-effectiveness, particularly in urban areas.⁸ Consumers are drawn to the value proposition of bulk purchasing and discounted prices. However, the model faces a key structural restraint: the upfront membership fee can be a barrier to entry for some potential customers, limiting the total addressable market.⁸ Opportunities for growth exist primarily through international expansion into emerging markets with a growing middle class and through the continued integration of e-commerce and digital services.⁸

The Post-Pandemic Consumer

The retail landscape has been reshaped by lasting shifts in consumer behavior following the COVID-19 pandemic. Several of these trends are particularly relevant to the warehouse club industry.

• Bifurcation of Spending: A notable trend is the bifurcation of consumer spending, where both the budget-conscious and premium segments are thriving, while many middle-market retailers face pressure.⁹ This polarization plays directly to the strengths of warehouse clubs, which are positioned as leaders in the value segment.
• Intensified Focus on Value: In an environment of economic uncertainty and inflation, consumers have become increasingly focused on value. In the first quarter of 2025, an estimated 75% of consumers reported trading down to more cost-effective brands for household essentials.¹¹ This “trade-down” effect serves as a significant tailwind for warehouse clubs, reinforcing their core value proposition and attracting new members seeking to stretch their budgets.
• Resilience of In-Person Retail: Despite the dramatic acceleration of e-commerce, consumer appetite for in-person shopping remains robust. Data from the first half of 2025 showed that foot traffic to retail and dining establishments was higher than pre-pandemic levels.⁹ This trend supports the physical warehouse model, particularly given the “treasure hunt” aspect of the Costco shopping experience, which encourages discovery and impulse buys.

E-commerce & Omnichannel Integration

The rise of e-commerce presents both a competitive challenge and a growth opportunity for warehouse clubs. Online-only retailers, with their lower overhead costs, can compete aggressively on price and offer the convenience of home delivery, posing a threat to the traditional brick-and-mortar model.⁸

However, e-commerce has also enabled warehouse clubs to expand their reach and offer new services. Costco operates e-commerce sites in eight countries, and this channel, while still a relatively small part of the business, is growing rapidly.² In fiscal 2024, e-commerce sales accounted for approximately 7% of Costco’s total net sales.² More recently, in the third quarter of fiscal 2025, the company reported a strong 14.8% growth in comparable e-commerce sales (15.7% adjusted for foreign exchange).⁵

The challenge for warehouse clubs is to successfully integrate their digital and physical operations into a seamless omnichannel experience. Competitors like Sam’s Club have been noted for their digital innovations, such as the “Scan & Go” mobile app that allows shoppers to bypass checkout lines.¹¹ While Costco’s in-store experience provides a unique draw that is difficult to replicate online, the company’s slower adoption of a fully integrated digital experience compared to some rivals could represent a long-term risk as younger, digitally native generations become the core consumer demographic.¹³

Inflationary and Supply Chain Pressures

The retail sector has faced significant headwinds from broad-based inflation and global supply chain disruptions over the past several years. For warehouse clubs, inflation can be a double-edged sword. On one hand, it increases merchandise and operating costs, putting pressure on already thin margins. On the other hand, a high-inflation environment drives more consumers to seek value, which can boost traffic and sales.¹¹ Costco’s management noted in its Q3 2025 earnings call that as some commodity costs began to fall, the company was able to lower prices on key items like eggs and butter, passing savings to members more quickly than competitors and reinforcing its value leadership.⁵

Supply chain disruptions remain a key risk for any business dependent on the global flow of goods.² Costco’s immense scale, high sales volume, and direct relationships with suppliers provide some insulation from these pressures. However, the company is not immune to logistics challenges, as evidenced by its temporary chartering of container ships during the peak of the supply chain crisis in 2022 and 2023.²

3. Competitive Position & Differentiation

Costco holds a dominant position within the warehouse club industry, a sector defined by intense competition among a few large players. The company’s scale, unique business model, and strong brand identity create formidable competitive advantages.

The Big Three: A Comparative Analysis

The warehouse club landscape is primarily a three-player market, with Costco as the clear leader, followed by Sam’s Club and the smaller BJ’s Wholesale Club.

Metric	Costco Wholesale (COST)	Sam’s Club (Walmart)	BJ’s Wholesale Club (BJ)
FY2024 Total Revenue	$249.6 billion	$86.0 billion	$20.5 billion
U.S. Store Count (2025)	627	599	266
Global Store Count (2025)	897+	U.S.-focused	U.S.-only
Est. U.S. Market Share (2022)	~62%	~31%	~7%
Key Strategic Focus	Higher-income demographics, services (travel), Kirkland brand loyalty	Digital innovation (“Scan & Go”), leveraging Walmart’s ecosystem	Fresh food focus (“Fresh 2.0”), smaller store format, regional concentration

Data Sources: ⁶

Costco’s financial lead is substantial, with revenues more than double those of its two main competitors combined.¹¹ This scale is a direct result of its larger store base and a membership model that attracts a slightly different demographic. Analysis of trade areas indicates that Costco tends to attract visitors from higher-income areas and larger households compared to Sam’s Club and BJ’s.¹⁴ This demographic may be less price-sensitive regarding the membership fee and have a greater capacity for bulk purchases, contributing to higher average transaction sizes and strong renewal rates.

While all three companies benefit from a value-driven consumer environment, they employ distinct strategies to differentiate themselves. Sam’s Club aggressively leverages the digital expertise of its parent company, Walmart, to create a more integrated and convenient shopping experience. BJ’s, with its smaller footprint concentrated in the Eastern U.S., differentiates itself by placing a heavy emphasis on its fresh food offerings, aiming to capture a larger share of its members’ regular grocery spending.¹¹

Sources of Competitive Advantage (Moats)

Costco’s durable competitive advantages, or “moats,” are deeply embedded in its business model and operational execution.

• Economies of Scale and Cost Leadership: Costco’s massive sales volume gives it unparalleled purchasing power, allowing it to demand the lowest possible prices from suppliers.³ This is combined with a relentless focus on cost control. The no-frills warehouse format, high inventory turnover, and efficient logistics create a low-cost operating structure that is exceptionally difficult for competitors to replicate.¹
• The Membership Model: The membership fee is the lynchpin of Costco’s competitive advantage. It creates a loyal, “sticky” customer base and provides a high-margin, recurring revenue stream that is decoupled from the daily fluctuations of retail sales. In fiscal 2024, membership fees of $4.8 billion accounted for over 52% of the company’s $9.3 billion in operating income.² This fee income provides a substantial profit cushion, enabling the company to price its merchandise with razor-thin margins, creating a value proposition that non-membership retailers find nearly impossible to match profitably on a sustained basis.
• Brand Loyalty and Intangible Assets: The trust and loyalty Costco has built with its members is a powerful intangible asset. This is most evident in the strength of the Kirkland Signature brand, which has become a destination brand in its own right, trusted by consumers for its quality and value.⁴

Broader Competitive Threats

Beyond its direct warehouse club rivals, Costco competes with a wide spectrum of retailers. These include global superstores like Walmart and Target, e-commerce giants like Amazon, and hard discounters such as Aldi and Lidl, all of whom vie for the value-conscious consumer’s wallet.¹⁶ While Costco’s model provides strong defenses, the retail landscape remains intensely competitive, requiring constant vigilance and execution to maintain its market position.

Pricing Strategy and Leadership

Costco’s pricing philosophy is not to maximize short-term profit on any single item but to maintain its long-term “pricing authority” in the minds of its members.² The company aims to provide the best possible value, reinforcing the idea that the membership fee is a worthwhile investment. This strategy builds immense trust and ensures that members turn to Costco first for a wide range of needs, confident they are receiving a fair price. This long-term focus, enabled by the profitability of the membership fee, is a key element of its sustained success and market leadership.

4. Financial Performance & Growth History

Costco has demonstrated a consistent and impressive track record of financial performance, characterized by steady top-line growth, disciplined cost management, strong profitability, and superior returns on capital. The company’s financial results reflect the strength and resilience of its membership-based business model over a multi-decade period.

Historical Growth Trajectory

An examination of Costco’s financial performance over the past decade reveals a powerful growth engine.

Fiscal Year	Total Revenue (in millions)	Net Sales (in millions)	Membership Fees (in millions)	Operating Income (in millions)	Net Income (in millions)	Diluted EPS
2015	$116,199	$113,666	$2,533	$3,616	$2,377	$5.37
2016	$118,719	$116,072	$2,647	$3,707	$2,350	$5.33
2017	$129,025	$126,172	$2,853	$4,110	$2,679	$6.08
2018	$141,576	$138,434	$3,142	$4,475	$3,134	$7.09
2019	$152,703	$149,351	$3,352	$4,737	$3,659	$8.26
2020	$166,761	$163,220	$3,541	$5,435	$4,002	$9.02
2021	$195,929	$192,052	$3,877	$6,708	$5,007	$11.27
2022	$226,954	$222,730	$4,224	$7,793	$5,844	$13.14
2023	$242,290	$237,710	$4,580	$8,114	$6,292	$14.16
2024	$254,453	$249,625	$4,828	$9,285	$7,367	$16.56
CAGR ’15-’24	9.1%	9.2%	7.4%	11.0%	13.4%	13.3%

Note: Net Income is attributable to Costco. Fiscal years end on the Sunday closest to August 31. Data compiled from company 10-K filings.

Data Sources: 2

Over the ten-year period from fiscal 2015 to 2024, Costco’s total revenue grew at a compound annual growth rate (CAGR) of 9.1%. Notably, net income and diluted earnings per share (EPS) grew at an even faster rate of 13.4% and 13.3%, respectively, demonstrating the company’s ability to generate operating leverage and expand profitability as it scales.

Profitability and Margin Analysis

Costco’s business model is intentionally designed to operate on thin margins for its merchandise sales, a strategy that is offset by the high-margin membership fee revenue.

Metric	FY2021	FY2022	FY2023	FY2024	TTM (May ’25)
Gross Margin %	12.9%	12.1%	12.3%	12.6%	12.8%
Operating Margin %	3.4%	3.4%	3.3%	3.7%	3.8%
Net Margin %	2.6%	2.6%	2.6%	2.9%	2.9%
Return on Equity (ROE) %	28.5%	30.7%	28.2%	31.2%	32.1%
Return on Invested Capital (ROIC) %	18.2%	19.3%	17.5%	19.4%	18.9%
Comparable Sales Growth %	16.0%	14.1%	5.3%	5.0%	N/A
Membership Renewal Rate %	91.0%	92.0%	90.5%	90.5%	N/A

Note: TTM is Trailing Twelve Months. Margins and returns are calculated based on financial statement data. Renewal rates are worldwide. Comparable sales growth is for the total company and includes impacts from gasoline prices and foreign exchange.

Data Sources: 2

The company’s margins have remained remarkably stable over time, a testament to its disciplined operational control. In fiscal 2024, the gross margin percentage increased by 35 basis points to 10.92% (as reported in the 10-K, which differs slightly from aggregated data sources due to calculation methods), a positive development driven by ancillary businesses and the absence of prior-year charges related to discontinued charter shipping activities.² Selling, General, and Administrative (SG&A) expenses as a percentage of net sales increased slightly by six basis points to 9.14% in fiscal 2024, reflecting higher employee wages that were partially offset by sales leverage and productivity gains.²

Returns on Capital

Despite its low-margin profile, Costco consistently generates high returns on capital, a key indicator of a high-quality business and efficient management. For the trailing twelve months ending in May 2025, the company’s Return on Equity (ROE) was an exceptional 32.1%, and its Return on Invested Capital (ROIC) was a strong 18.9%.²³ These figures demonstrate management’s effectiveness at deploying shareholder capital to generate profits.

Cash Flow Generation & Working Capital

Costco’s business model is a highly efficient cash-generating machine. A key feature is its negative working capital cycle. The company’s high inventory turnover and favorable payment terms with suppliers mean that it often collects cash from its customers for the sale of merchandise before it has to pay its vendors for that same inventory.² This creates a “float” that helps finance the company’s operations and growth. In fiscal 2023, the company generated a robust $11.1 billion in cash flow from operating activities.²⁵

Key Performance Indicators

Two of the most critical metrics for evaluating Costco’s performance are comparable sales growth and membership renewal rates.

• Comparable Sales Growth: This metric, also known as same-store sales, measures the year-over-year sales growth from warehouses open for more than one year. It is a vital indicator of the underlying health and customer appeal of the business, stripping out the impact of new store openings. In the third quarter of fiscal 2025, Costco reported total company comparable sales growth of 5.7%, or 8.0% when adjusted for the impacts of gasoline price deflation and foreign currency fluctuations.⁵
• Membership Renewal Rates: This metric is a direct reflection of customer satisfaction and loyalty. Costco’s ability to consistently maintain renewal rates above 90% globally underscores the “stickiness” of its customer base and the perceived value of its membership.²

5. Growth Opportunities & Strategy

While Costco is a mature company, it continues to pursue a clear and disciplined growth strategy focused on expanding its physical and digital footprint, enhancing member value, and leveraging its pricing power.

Warehouse Expansion

The primary driver of Costco’s long-term growth remains the systematic opening of new warehouses in both domestic and international markets. Management has indicated plans to open 28 new locations (25 net new after relocations) in fiscal 2025.²⁶

• International Focus: A significant portion of this expansion is targeted outside the U.S., in markets such as Sweden, Korea, and China, where the company’s penetration is lower and the growth potential is higher.⁵
• Domestic Infill and “Strategic Cannibalization”: In more mature markets like the U.S., the strategy involves not only entering new regions but also strategically opening new warehouses near existing high-volume locations. Management refers to this as “strategic cannibalization.” The goal is to relieve overcrowding at the busiest warehouses, which improves the shopping experience for members and can ultimately lead to higher overall sales for the company in that market.⁵

Digital & E-commerce Initiatives

Recognizing the evolving retail landscape, Costco is making targeted investments to improve its digital capabilities and e-commerce offerings. While the in-warehouse experience remains central to its identity, the company is focused on creating a more seamless omnichannel experience for its members.

• Improving the Digital Experience: Key initiatives include building capabilities for more personalized digital marketing, developing a product recommendation hub based on member browsing and purchase history, and piloting technology to speed up in-warehouse checkout processes.⁵
• Costco Logistics: The company is significantly investing in its “big and bulky” delivery network, known as Costco Logistics. This service, which includes installation and haul-away of old items, is powering substantial growth in online sales for categories like appliances and furniture, with items delivered increasing by 31% in the third quarter of fiscal 2025.⁵
• New Digital Offerings: Costco recently launched a “Buy Now Pay Later” option in partnership with Affirm to make big-ticket purchases more accessible to members. Initial results from this offering have been positive.⁵

Ancillary Business Growth

Costco’s ancillary businesses are not only profitable in their own right but also serve as crucial traffic drivers for the warehouses. The gasoline business is a prime example. By consistently offering some of the lowest fuel prices in a given market, Costco draws members to its locations on a regular basis. In the third quarter of fiscal 2025, the company reported two of its all-time highest weekly gallon volumes in the U.S. after extending operating hours and further investing in price.⁵ Other services, such as the pharmacy, optical centers, and travel, add layers of value to the membership, increasing its utility and stickiness.

Membership Fee Pricing Power

One of the most powerful and predictable levers for profit growth is the company’s ability to periodically increase its membership fees. Given the high renewal rates and the strong value proposition, Costco has demonstrated significant pricing power in this area.

The most recent fee increase took effect on September 1, 2024, when the annual fee for Gold Star and Business memberships in the U.S. and Canada was raised by $5, from $60 to $65. The fee for Executive membership increased by $10, from $120 to $130.² This single action is expected to increase the company’s high-margin revenue by approximately $370 million over the subsequent two years as memberships come up for renewal.²

The cadence of these increases is a key consideration for investors. Management has historically been patient, ensuring the value proposition is strong enough to support a price hike without negatively impacting renewal rates. The decision to raise fees is often described by management as a question of “when, not if,” signaling that this will continue to be a reliable tool for future earnings growth.

6. Capital Allocation & Financial Management

Costco’s management team has a long-standing reputation for its disciplined and shareholder-friendly approach to capital allocation. The company’s priorities are to reinvest in the business to drive long-term growth while consistently returning excess cash to shareholders through a combination of dividends and share repurchases. This is all supported by a fortress-like balance sheet.

Capital Expenditure Priorities

The company’s primary use of capital is to fund its growth, with a clear focus on expanding its warehouse footprint and enhancing its supply chain capabilities.

• New Warehouses: The construction of new warehouses represents the largest portion of capital expenditures (CapEx).
• Logistics and E-commerce: Significant investments are being made to optimize the company’s depot network and build out the Costco Logistics network to support the growth of its e-commerce business, particularly for large items.⁵
• Remodels and Technology: Capital is also allocated to remodeling existing warehouses and investing in technology to improve operational efficiency and the member experience.

For fiscal year 2025, management has guided for total CapEx to be slightly over $5 billion.⁵

Dividend Policy

Costco’s dividend policy is unique and consists of two components: a regular quarterly dividend and periodic special cash dividends.

• Regular Dividend: The company has a strong track record of paying a regular quarterly dividend and has increased this dividend for 20 consecutive years, a sign of its financial stability and commitment to shareholder returns.²⁷ On July 16, 2025, the Board of Directors declared a quarterly dividend of $1.30 per share.²⁸
• Special Dividends: A hallmark of Costco’s capital return strategy is the payment of large, infrequent special cash dividends when excess cash accumulates on the balance sheet. The company has paid five such dividends: $7.00 per share in 2012, $5.00 in 2015, $7.00 in 2017, $10.00 in 2020, and most recently, $15.00 per share in January 2024.²⁹ These special dividends represent a significant return of capital to shareholders, though their timing is not predictable.

Share Repurchase Programs

In addition to dividends, Costco returns capital to shareholders through share repurchase programs. The company’s approach to buybacks has historically been opportunistic rather than systematic.

• In January 2023, the Board of Directors authorized a new $4 billion common stock repurchase program, set to expire in January 2027. This replaced a previous $4 billion program that was nearing its expiration.³²
• The actual pace of repurchases has been modest in recent years. In fiscal 2024, the company repurchased $700 million of its stock. This followed repurchases of $676 million in fiscal 2023 and $439 million in fiscal 2022.³³

Balance Sheet Strength and Debt Management

Costco maintains a conservative financial profile and a very strong balance sheet.

• As of May 11, 2025, the company held $13.8 billion in cash and cash equivalents and $1.0 billion in short-term investments.¹²
• Total long-term debt was $5.7 billion, resulting in a net cash position (cash and investments exceeding debt).¹²
• The company’s debt-to-equity ratio is low, standing at 0.31 as of August 2025, which indicates minimal reliance on leverage and significant financial flexibility.²³ This strong financial position allows the company to fund its growth initiatives and weather economic downturns without financial strain.

7. Recent Challenges & Headwinds (Past 24 Months)

Over the past two years, Costco, like the broader retail industry, has navigated a complex and challenging macroeconomic environment. The primary headwinds have stemmed from persistent inflation, global supply chain disruptions, rising labor costs, and foreign currency fluctuations.

Impact of Inflation on Operations and Margins

Broad-based inflation has presented a dual challenge. It has increased the cost of goods sold, putting pressure on Costco’s already thin merchandise margins. It has also increased operating expenses, particularly in areas like utilities and transportation. While the company’s scale and purchasing power provide some mitigation, it is not immune to these pressures.² Management has had to strategically decide whether to absorb these higher costs or pass them on to members, carefully balancing profitability with its commitment to maintaining its pricing authority.² On the consumer side, while inflation drives value-seeking behavior that can benefit Costco, it also erodes household purchasing power, potentially impacting sales of higher-ticket discretionary items.

Supply Chain Disruptions and Inventory Management

The global supply chain disruptions that began during the pandemic continued to present challenges. These disruptions led to increased shipping costs, longer lead times, and uncertainty in product availability. In response, Costco took the extraordinary step of chartering its own container ships between 2022 and 2023 to ensure a steady flow of merchandise. The subsequent normalization of supply chains and the discontinuation of these chartering activities provided a 16 basis point positive impact to gross margin in fiscal 2024.² Managing inventory in this environment has been complex, requiring a careful balance between ensuring product availability and avoiding excess stock that could lead to markdowns.²

Labor Cost Pressures and Wage Inflation

Costco has a long-standing philosophy of providing its employees with competitive wages and benefits, viewing it as a key driver of high productivity and low employee turnover.² In a tight labor market characterized by significant wage inflation, the company has implemented several wage increases to remain a competitive employer. While consistent with its long-term strategy, these actions have directly increased Selling, General, and Administrative (SG&A) expenses. Management commentary from earnings calls in late 2024 and early 2025 explicitly cited higher employee wages as a headwind to SG&A as a percentage of sales.²⁶

Currency Headwinds from International Operations

As a global company with significant operations in Canada and other international markets, Costco’s reported financial results are subject to the effects of foreign currency translation. Over the past two years, a relatively strong U.S. dollar has created a headwind, causing revenues and profits generated in foreign currencies to translate into fewer U.S. dollars. For fiscal year 2024, changes in foreign currency rates had an estimated negative impact of $474 million on net sales.² This effect was also noted as a drag on comparable sales results in the first and second quarters of fiscal 2025.²⁶

8. Key Risks & Concerns

Despite its strong track record and formidable competitive advantages, an investment in Costco is not without risks. These concerns range from macroeconomic sensitivities to business model-specific vulnerabilities and execution challenges.

Economic Recession Impact

While Costco’s value proposition often allows it to perform well during economic slowdowns as consumers “trade down” from more expensive retailers, a severe or prolonged recession could still negatively impact its business. A significant rise in unemployment and a sharp contraction in consumer spending could lead to reduced spending on big-ticket, discretionary items, which are an important part of Costco’s merchandise mix. Furthermore, financially strained households may choose not to renew their memberships to save on the annual fee, which would directly impact the company’s most profitable revenue stream.²

Margin Pressure from Competition and Costs

The company’s business model is built on extremely thin merchandise margins. This makes its profitability sensitive to both competitive pressures and cost inflation. Intense price competition from rivals like Sam’s Club, Walmart, or Amazon could force Costco to lower its prices further, compressing margins. Similarly, a sustained period of high inflation in merchandise costs, labor, or freight that cannot be fully passed on to consumers could erode profitability.² While the membership fee provides a buffer, any significant deterioration in merchandise gross margin would be a concern.

Real Estate and Expansion Risks

Costco’s growth is heavily dependent on opening new warehouses. As the U.S. market becomes more saturated, finding suitable and economically viable real estate sites for its large-format stores is becoming increasingly difficult and expensive. New store openings in existing markets also carry the risk of “cannibalization,” where a new store’s sales come at the expense of a nearby existing one.² International expansion, while a key growth driver, presents its own set of risks, including navigating different regulatory environments, consumer preferences, and supply chain complexities.²

Dependency on the Membership Fee Model

The membership fee is the lifeblood of Costco’s profitability. This creates a dependency that is also a key risk. Any event that could tarnish the Costco brand or damage member trust—such as a major data breach, a widespread product safety issue, or a significant decline in the perceived value of the membership—could lead to a drop in renewal rates. Because membership fees flow to the bottom line at a very high margin, even a small decline in the renewal rate could have a disproportionately large negative impact on the company’s operating income.²

CEO and CFO Transition

The company is undergoing a significant leadership transition. Long-time CEO Craig Jelinek retired at the beginning of 2024, succeeded by 40-year company veteran Ron Vachris.³ Additionally, Richard Galanti, who served as CFO for nearly four decades and was a widely respected voice with the investment community, retired in early 2025.³⁵ While the new leadership team consists of experienced insiders and executives, any major transition at the top introduces a degree of uncertainty regarding strategic vision and execution. The performance of the new CEO and CFO will be under close scrutiny as they guide the company forward.

9. Management Quality & Governance

The quality and strategic vision of a company’s leadership team and the soundness of its corporate governance practices are critical factors in its long-term success. Costco has a history of stable, long-tenured leadership and a corporate culture that is deeply ingrained in its operations.

Leadership Team and Succession

Costco is currently navigating a pivotal leadership transition.

• Chief Executive Officer: As of January 1, 2024, Ron M. Vachris took over as CEO. Mr. Vachris is a Costco stalwart, having been with the company for over 40 years. He began his career as a forklift driver and worked his way up through numerous operational roles, including warehouse manager and Executive Vice President of Merchandising, before serving as President and Chief Operating Officer prior to his promotion to CEO.³ This deep, hands-on experience provides him with an intimate understanding of the company’s culture and business model. The promotion of a long-term insider is often viewed as a positive indicator of strategic continuity, reducing the risk of a disruptive shift away from the core principles that have driven the company’s success.
• Chief Financial Officer: A more significant transition occurred in the CFO role. Richard Galanti, who had been the public face of the company to investors for nearly 40 years, retired in February 2025.³⁵ He was succeeded by Gary Millerchip, who was hired from The Kroger Co., where he had also served as CFO.²⁶ While Mr. Millerchip brings extensive retail and financial experience, the market will be closely watching his integration into Costco’s unique culture and his communication with the investment community.

Corporate Governance Practices

Costco’s governance structure is outlined in its annual proxy statement. The most recent definitive proxy statement (Schedule 14A) was filed with the SEC on December 11, 2024, for the annual shareholders’ meeting held on January 23, 2025.³⁶

• Board of Directors: For the 2025 annual meeting, the Board nominated nine individuals for election as directors to serve until the 2026 annual meeting. The elected directors include Susan L. Decker, Kenneth D. Denman, Helena B. Foulkes, Hamilton E. James (Chairman), Sally Jewell, Jeffrey S. Raikes, John W. Stanton, Ron M. Vachris (CEO), and Maggie Wilderotter.³⁸ The board is comprised of individuals with diverse backgrounds in technology, retail, finance, and public service.
• Shareholder Rights: The company holds annual elections for all directors. At the 2025 meeting, shareholders were asked to vote on the election of directors, the ratification of KPMG LLP as the independent auditor for fiscal 2025, and an advisory vote to approve the compensation of the named executive officers (“say-on-pay”).³⁶
• Management Communication: The company maintains a high level of transparency through its regular SEC filings, quarterly earnings reports, and conference calls. The leadership team has historically provided detailed insights into the company’s performance, strategy, and the broader retail environment.

The company’s governance framework appears to be aligned with standard practices for a large public company. The long-term stability of the management team and the board, coupled with the promotion of an insider to the CEO role, suggests a strong emphasis on preserving the corporate culture that is central to Costco’s identity and success.

10. Valuation Analysis

Costco’s stock has historically traded, and continues to trade, at a significant premium to its retail peers and the broader market. This premium valuation reflects the market’s appreciation for the company’s consistent growth, high returns on capital, strong competitive moats, and the recurring nature of its membership fee revenue. An analysis of its valuation requires examining its multiples in historical and relative contexts, as well as considering the underlying assets and cash flows of the business.

Current Trading Multiples vs. Historical Ranges

A review of Costco’s valuation multiples shows a significant expansion over the past decade, with current levels well above their long-term averages.

• Price-to-Earnings (P/E) Ratio: As of August 2025, Costco’s trailing twelve-month (TTM) P/E ratio stands at approximately 55.0x.³⁹ This is substantially higher than its 10-year historical average P/E of 37.0x. The multiple has trended consistently upward, peaking at over 62x in early 2025 before moderating slightly.³⁹
• Enterprise Value-to-EBITDA (EV/EBITDA) Ratio: The company’s LTM EV/EBITDA multiple is approximately 34.7x.⁴⁰ This also represents a significant premium to its 5-year average of 25.9x, indicating a recent and sharp expansion in this valuation metric.⁴⁰
• Price-to-Sales (P/S) Ratio: The current TTM P/S ratio is approximately 1.6x.²³ This has more than doubled from the 0.5x-0.8x range where it traded for much of the previous decade, reflecting the market’s increasing willingness to pay a higher price for each dollar of Costco’s sales.⁴²

Peer Comparison Valuation Metrics

The premium valuation is even more apparent when compared to Costco’s direct competitors and other large-scale retailers.

Valuation Multiple (TTM)	Costco (COST)	Walmart (WMT)	BJ’s Wholesale (BJ)	Target (TGT)
P/E Ratio	~55.0x	~43.0x	~25.0x	~11.3x
EV/EBITDA Ratio	~34.7x	~20.9x	~15.6x	~7.2x
P/S Ratio	~1.6x	~1.2x	~0.7x	~0.7x

Note: Multiples are as of August 2025 and are approximate. Peer data may have different fiscal year-ends.

Data Sources: 39

Costco consistently trades at a valuation that is orders of magnitude higher than its peers on nearly every metric. This persistent premium suggests that the market views Costco not just as a retailer, but as a fundamentally higher-quality business with more predictable and durable earnings power.

Membership Value and Recurring Revenue Premium

The primary justification for Costco’s premium valuation lies in the nature of its membership fee revenue. This stream of income, which accounts for over half of the company’s operating profit, is highly predictable and recurring, with renewal rates consistently exceeding 90%.² The market values this stable, annuity-like cash flow stream far more highly than it values the more cyclical and lower-margin profits from merchandise sales. In this respect, Costco’s business model has characteristics similar to a subscription-based service (like Software-as-a-Service or SaaS), which typically command much higher valuation multiples than traditional retailers. This “subscription” component, layered on top of a massive and efficient retail operation, is the core reason for the valuation premium over peers like Walmart and Target, which lack this powerful recurring revenue engine.

Asset-Based Valuation Considerations

Costco owns a substantial portfolio of real estate. As of the end of fiscal 2024, the company reported net Property, Plant, and Equipment (PP&E) on its balance sheet of $29.0 billion, a figure that grew to $30.6 billion by May 2025.⁵⁰ It is widely assumed that the book value of these assets significantly understates their current market value, as many of the properties were acquired years or decades ago. This valuable real estate portfolio provides a degree of tangible asset backing to the company’s valuation, though it is not the primary driver of its market price.

Free Cash Flow Yield and Dividend Yield Analysis

Reflecting its high valuation, Costco’s current yields are low.

• Free Cash Flow (FCF) Yield: Based on TTM data, the company’s FCF yield is approximately 1.70%.²³
• Dividend Yield: The forward dividend yield on the regular quarterly dividend is approximately 0.53%.²³

While these yields appear low, the regular dividend yield does not account for the company’s history of paying large special dividends, which have significantly increased the total cash return to shareholders over time.

Intrinsic Value Considerations

Discounted Cash Flow (DCF) models, which attempt to estimate a company’s intrinsic value based on its future cash flows, produce a wide range of outcomes for Costco, highlighting the sensitivity of such models to their underlying assumptions.

• One DCF analysis using a relatively high discount rate of 10% and a terminal growth rate of 3% calculated an intrinsic value of approximately $249 per share, suggesting the stock is significantly overvalued.⁵²
• Another analysis using a two-stage model with a lower cost of equity of 6.1% estimated a fair value of around $904 per share, implying the stock is trading close to its intrinsic value.⁵³
• A third model from Simply Wall St. estimates a fair value of $676 per share, also suggesting overvaluation relative to the current price.⁵⁴

This wide dispersion in DCF outcomes underscores the central debate surrounding Costco’s stock. The current market price clearly embeds expectations for strong, consistent growth for many years into the future. An assessment of whether the stock is fairly valued, overvalued, or undervalued depends heavily on an investor’s confidence in the company’s ability to meet or exceed these high expectations over the long term.

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