Costco: the membership fee is the business, the merchandise is the proof
Costco earns most of its profit from membership fees and sells goods at close to cost to keep members renewing. That design makes earnings steadier than any ordinary retailer and lets the company reinvest savings in lower prices.
We rate the stock a Buy with a target of $1,010. The multiple is high, but the quality of the revenue and the room to open more warehouses abroad justify it.
Company overview
Costco operates membership warehouses that sell a limited range of goods in bulk under tight markup rules. A small number of items per category means huge volume per item, which gives it purchasing leverage few rivals can match.
Roughly half of operating profit comes from membership fees, paid up front and renewed annually.
- Headquarters
- Issaquah, WA
- Founded
- 1983
- Warehouses
- ~920 worldwide
- Paid members
- ~82 million
- Exchange
- NASDAQ: COST
Management overview
The team is built from long-serving operators. The recent handover of the chief executive role was orderly and the culture of low markups and high wages has not changed.
Career Costco operator who took over as chief executive in 2024; focus on warehouse growth and supply chain.
Joined from the grocery sector in 2024; owns capital allocation and the special dividend decision.
Took over merchandising in March 2026 after leading foods and sundries buying; oversees the categories where the private label Kirkland Signature is a margin and loyalty lever.
Investor and long-time director who chairs the board; independent oversight of pay and succession.
Other considerations
Investment thesis and considerations
The thesis is that the market treats Costco as a grocer when it behaves like a subscription business with a store attached.
1. Fees drive predictable profit
Renewal rates above 90% and periodic fee increases turn most operating profit into a recurring stream.
The last fee increase took the standard membership to a new price, and renewal rates held up. Because fees are paid in advance and the cost of serving a member is mostly already covered by merchandise margin, each increase flows mostly to profit. We expect a further increase around 2029 on the historical cycle of five and a half years, and we model it at the low end of the past range.
2. International warehouses are early
Newer markets have a fraction of the warehouses per person of the U.S. and mature quickly.
Warehouses opened abroad reach sales volumes similar to U.S. ones within a few years, and executive commentary points to a faster opening pace in Asia and Europe. We estimate that international markets contribute under a fifth of profit today and could near a third by the end of the decade. The market appears to model slow, mature-market growth for the whole company.
3. Price discipline is the moat
A fixed markup cap keeps prices low, which builds trust that competitors cannot buy.
The company limits its markup on most goods and returns savings to members. The result is a loyalty effect that shows up in renewals and in the willingness of suppliers to give volume terms. The risk to this view is a competitor matching the model, which would require years of lower profit; we see no sign of it. A pullback toward $820 would strengthen the case for adding.
Bull case
Bear case
Financial profile
USD billions except per-share data; fiscal years end near the first of September.
| Metric | FY21 | FY22 | FY23 | FY24 | FY25 |
|---|---|---|---|---|---|
| Revenue | 195.9 | 226.9 | 242.3 | 254.5 | 275.2 |
| Membership fees | 3.9 | 4.2 | 4.6 | 4.8 | 5.3 |
| Operating income | 6.7 | 7.8 | 8.7 | 9.3 | 10.4 |
| Net income | 5.0 | 5.8 | 6.3 | 7.4 | 8.1 |
| Diluted EPS | $11.27 | $13.14 | $14.16 | $16.56 | $18.20 |
Financial projections
| Metric | FY26E | FY27E | FY28E | FY29E | FY30E |
|---|---|---|---|---|---|
| Revenue | 295.0 | 316.5 | 339.0 | 363.0 | 388.5 |
| Membership fees | 5.7 | 6.1 | 6.5 | 7.4 | 8.0 |
| Operating margin | 3.9% | 3.9% | 4.0% | 4.1% | 4.1% |
| Diluted EPS | $19.90 | $21.80 | $23.90 | $26.40 | $28.90 |
Key assumptions
- Comparable sales grow 5.5% a year excluding fuel; about 25 net new warehouses a year.
- Membership fee increase in FY29 at the low end of the historical range.
- Merchandise gross margin steady within 20 basis points.
Valuation profile
| Method | Weight | Value / share |
|---|---|---|
| Discounted cash flow | 50% | $1,030 |
| Trading comps | 30% | $1,000 |
| Unit economics (fee stream) | 20% | $980 |
| Blended target | 100% | $1,010 |
The discounted cash flow carries half of the weight. Because the multiple is the contested point, the comps method uses the best-in-class retailers rather than the grocery sector. The unit economics method values the fee stream directly.
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6 filesEducational research produced by graduate students. Not investment advice. Figures are illustrative samples.