Costco Wholesale Corporation stands as a dominant force in the retail industry, recording net sales of $270 billion in fiscal year 2025, which ended on August 31. This achievement positions it just behind retail giants Walmart and Amazon in size worldwide.
Investors have historically seen robust returns from Costco's shares, with an impressive 429% increase over the past decade up to December 23. Despite this long-term growth, it is notable that its stock price has experienced a 7% decrease thus far in 2025.
To better understand the company's investment potential, it is important to explore three critical aspects of Costco's operations and stock performance.
Membership Revenue Stream Drives Profitability
Costco operates 921 warehouse clubs that retail a broad assortment of items, including groceries, clothing, electronics, and home goods. However, gross profit from merchandise sales is not the central focus of Costco’s revenue model. The company's gross margin stood at approximately 11.3% in the first quarter of fiscal 2026, which ended on November 23, indicating low mark-ups on inventory compared to typical retailers who usually maintain much higher margins.
The fundamental source of Costco's profits lies in its membership program. Customers pay an annual fee to gain access to warehouses and shop within them. The most recent quarter saw membership numbers climb by 5.2% year-over-year, reaching a total of 81.4 million members. This increase helped push membership revenue up to $1.3 billion. Furthermore, the company's global membership renewal rate remains strong near 90%, underscoring robust consumer loyalty.
These membership fees represent a high-margin, recurring stream of income, giving Costco unique pricing power. The model encourages frequent visits, reinforcing the perceived value of the annual fee for customers. This dynamic may be a key factor in Costco's consistent same-store sales growth over time.
Economies of Scale Enhance Competitive Advantages
In investment analysis, companies with durable competitive advantages, or “economic moats,” typically perform well over the long term. Costco exemplifies this concept, benefiting from significant scale that translates into a major cost advantage. The enormous net sales figure of $270 billion in fiscal 2025 enhances the company’s buying power substantially.
Each Costco warehouse typically stocks around 4,000 unique product items—significantly fewer than the roughly 30,000 SKUs found in a conventional supermarket. This focused selection allows Costco to purchase large quantities of a smaller range of goods, which in turn improves its negotiating leverage with suppliers. As a result, the company achieves low procurement costs and passes savings on to customers regularly.
This advantage strengthens progressively. Higher sales volumes enhance supplier negotiations, which then generate further cost savings, supporting a positive feedback loop sustaining Costco’s pricing power and customer value proposition.
Stock Valuation Remains Elevated Despite Recent Price Decline
Since reaching a peak early in February 2025, Costco’s shares have dropped approximately 21%. This decline has occurred even though the company has continued to deliver solid financial results that do not suggest any deterioration of its competitive standing. Such a decrease might attract some investors seeking entry points.
However, despite this pullback, the valuation still appears high. Acquiring shares currently requires accepting a price-to-earnings ratio of about 45.7, representing an 81% premium compared to the S&P 500 index. For value-oriented investors, this steep premium might lack an adequate margin of safety.
On the other hand, some investors may justify the high valuation by viewing Costco as a durable, predictable, and stable business that merits a premium. This view aligns with the company’s impressive net income growth, which surged 241% between fiscal years 2015 and 2025, as well as its consistent expansion of about 25 new store openings annually.
While precisely determining market sentiment and appropriate valuation remains challenging, there seems to be some merit to the notion that Costco’s shares may persistently trade at elevated price-to-earnings multiples relative to the overall market.
Summary
Costco's financial strength is anchored in a robust membership model that generates high-margin, recurring revenue. Its scale-driven cost advantages fortify its market position, creating a sustainable competitive moat. Although shares have retracted from recent highs, their valuation continues to reflect a considerable premium, potentially offset by expectations of long-term stability and growth.
Key Points
- Costco’s membership program fuels a significant portion of its profitability through recurring fees and strong customer loyalty.
- The company leverages massive scale and a limited product selection to negotiate advantageous supplier contracts, producing a cost advantage for sustained savings.
- After a notable share price decline in 2025, Costco stock remains expensive compared to market averages, reflecting a premium for its stability and growth trajectory.
Risks and Uncertainties
- The high price-to-earnings ratio implies limited margin of safety for investors concerned about valuation risk.
- Any future challenge to Costco’s membership renewal rates or ability to maintain low prices could disrupt its revenue model.
- Market sentiment and valuation levels are difficult to predict, creating uncertainty regarding future stock price movements.