Company Background and History
Costco Wholesale Corporation (NASDAQ:COST) has long been a dominant force in the retail industry, known for its exceptional value proposition and unwavering commitment to its members. Founded in 1983, the company has steadily grown to become one of the largest membership warehouse club chains globally, with a presence spanning across the United States, Canada, Mexico, Japan, the United Kingdom, Korea, Australia, Taiwan, China, Spain, France, Iceland, New Zealand, and Sweden.
Costco's impressive history can be traced back to its inception in 1983, when founders James Sinegal and Jeffrey Brotman opened the first Costco warehouse in Seattle, Washington. The company's innovative business model, which focused on providing members with a limited selection of high-quality merchandise at deeply discounted prices, quickly gained traction and allowed Costco to rapidly expand its footprint across North America. By the early 1990s, Costco had merged with rival Price Club, solidifying its position as a leading wholesale retailer.
Over the years, Costco has continued to refine and enhance its operational efficiency, leveraging its global purchasing power and strong supplier relationships to offer unbeatable value to its members. As of November 2024, the company operated 896 warehouses worldwide, with 616 located in the United States, 109 in Canada, 41 in Mexico, 36 in Japan, 29 in the United Kingdom, 19 in Korea, 15 in Australia, 14 in Taiwan, seven in China, five in Spain, two in France, and one each in Iceland, New Zealand, and Sweden.
Financials
Costco's financial performance has been nothing short of impressive, with the company consistently delivering strong revenue and earnings growth. In the fiscal year ended September 1, 2024, Costco reported total revenue of $254.45 billion, a 5.0% increase from the prior year, and net income of $7.37 billion, or $16.56 per diluted share. The company's operating cash flow for the year was $11.34 billion, and its free cash flow reached $6.63 billion.
In the most recent quarter (Q2 2025), Costco's revenue increased 9.1% year-over-year to $62.53 billion, while net income grew 2.6% to $1.79 billion. The increase in revenue was driven by strong comparable sales growth across all regions, with US comparable sales up 8.3% (8.6% excluding gas deflation), Canada comparable sales up 4.6% (10.5% excluding gas deflation and FX), and Other International comparable sales up 1.7% (10.3% excluding gas deflation and FX). E-commerce sales were particularly strong, with comparable sales growth of 20.9%, or 22.2% when adjusted for foreign exchange rates.
Membership fee revenue, a key driver of Costco's profitability, increased 7.4% to $1.19 billion in Q2 2025. This growth was driven by new member sign-ups and upgrades to Executive Membership. The company's membership renewal rates remained impressive, with a US/Canada renewal rate of 93% and a worldwide rate of 90.5%.
Costco's gross margin rate improved by 5 basis points to 10.85% in Q2 2025, or 4 basis points excluding gas deflation. The core merchandise categories saw a 5 basis point increase, which was partially offset by a 1 basis point decline in ancillary and other businesses. SG&A expenses as a percentage of net sales decreased 8 basis points to 9.06%, driven by improved labor productivity and cost discipline.
Liquidity and Solvency
Looking at Costco's liquidity and solvency, the company's financial position remains robust. As of September 1, 2024, Costco had $9.91 billion in cash and cash equivalents, $1.24 billion in short-term investments, and a current ratio of 0.97, indicating a healthy ability to meet its short-term obligations. The company's debt-to-equity ratio stood at 0.35, suggesting a conservative approach to leverage.
Costco's key financial ratios also paint a picture of a well-managed, efficient, and profitable organization. The company's gross profit margin was 12.6% in fiscal 2024, while its operating profit margin was 3.6%. Costco's return on assets and return on equity were 10.4% and 31.9%, respectively, demonstrating its ability to generate strong returns for its shareholders.
As of the most recent quarter, Costco's debt-to-equity ratio improved to 0.035, showcasing the company's strong financial position. The company had $9.91 billion in cash and cash equivalents, with additional liquidity available through $1.18 billion in bank credit facilities and $222 million in letter of credit facilities. Costco's current ratio stood at 0.97, while its quick ratio was 0.49, indicating a solid ability to meet short-term obligations.
Business Model and Competitive Advantage
One of the critical drivers of Costco's success has been its relentless focus on delivering value to its members. The company's membership model, which offers both standard and executive-level memberships, has been a significant source of recurring revenue and profitability. As of the end of fiscal 2024, Costco had 77.4 million paid household memberships, with an impressive worldwide renewal rate of 90.5%.
Costco's merchandise offerings span a diverse range of categories, including foods and sundries, non-foods, fresh foods, and various ancillary businesses such as gasoline, pharmacy, optical, food court, hearing aids, and tire installation. The company's ability to source and offer high-quality products at low prices has been a key factor in attracting and retaining its loyal customer base.
Costco's core merchandise categories include Foods and Sundries (shelf-stable food, candy, snacks, alcoholic and nonalcoholic beverages, and cleaning and institutional supplies), Non-Foods (household hard goods, leisure, apparel, tires, jewelry, toys, seasonal items, and small appliances), and Fresh Foods (fresh meat, produce, deli, and bakery). These categories constitute the majority of Costco's net sales and saw a 10% year-over-year increase in the first quarter of fiscal 2025.
In addition to its core merchandise, Costco operates several warehouse ancillary and other businesses, including gasoline stations, pharmacies, optical departments, food courts, hearing aid centers, and tire installation. While these ancillary businesses generally have lower gross margins compared to the core merchandise categories, they help drive traffic and sales in the warehouses. Notably, gasoline sales represent over 18% of total net sales, although lower gasoline prices in the recent quarter negatively impacted net sales by 160 basis points compared to the prior year period.
In recent years, Costco has also made significant investments in its e-commerce capabilities, recognizing the growing importance of online shopping. The company's e-commerce sales have been a bright spot, with comparable sales growth of 20.9% in the second quarter of fiscal 2025, or 22.2% when adjusted for the impact of foreign exchange rates. Costco operates e-commerce websites in several countries and provides business delivery services, although these operations generally have lower gross margins compared to the warehouse operations.
Resilience and Adaptability
Despite the challenges posed by the COVID-19 pandemic, Costco has demonstrated its resilience and adaptability. The company has continued to invest in its infrastructure, opening 26 net new warehouses in fiscal 2024 and planning for 28 new openings in fiscal 2025, including three relocations.
Moreover, Costco has remained committed to its employees, providing industry-leading wages and benefits. In March 2025, the company implemented a new employee agreement that included an immediate $1 per hour top-of-scale increase, followed by additional $1 increases in March 2026 and March 2027. The top-of-scale wage for U.S. service clerks is now $31.90 per hour, and the average wage for U.S. and Canada employees is a little more than $31 per hour.
While Costco has navigated recent macroeconomic headwinds, including the impact of tariffs and inflationary pressures, the company's management team has demonstrated its ability to adapt and minimize the effects on its operations. Costco's strong relationships with suppliers, agile procurement strategies, and unwavering focus on value have allowed it to maintain its competitive edge.
Future Outlook
Looking ahead, Costco remains well-positioned for continued success. The company's expansion plans, both domestically and internationally, coupled with its ability to adapt to changing market conditions, suggest a bright future. Additionally, Costco's focus on innovation, such as the introduction of new Kirkland Signature products and the enhancement of its digital capabilities, underscores its commitment to delivering an exceptional experience for its members.
Costco's consistent strong performance is evident in its 5-year revenue CAGR of 8.8% and net income CAGR of 10.9%. The company has successfully navigated macroeconomic headwinds and continues to capitalize on its value proposition to drive growth. While specific forward-looking guidance was not provided, management noted that headwinds from foreign exchange rates and potential tariffs are expected to continue. However, Costco remains focused on minimizing the impact of cost increases on its members.
Challenges and Legal Issues
Throughout its history, Costco has faced various challenges, demonstrating its resilience and ability to adapt. In 2017, the company was included in consolidated opioid cases filed against various defendants by counties, cities, hospitals, Native American tribes, third-party payors, and others, alleging impacts of opioid abuses. This legal challenge highlighted the complexities of operating in the pharmaceutical sector and the broader societal issues surrounding opioid use.
More recently, starting in 2023, Costco found itself named in multiple class action lawsuits alleging privacy law violations stemming from pixel trackers on its website. These legal challenges underscore the growing importance of data privacy and the need for companies to carefully navigate the digital landscape while respecting consumer rights.
In 2024, Costco received a Civil Investigative Demand from the U.S. Attorney's Office regarding a False Claims Act investigation concerning prescription medications. This development further emphasized the regulatory scrutiny faced by large retailers operating in the healthcare space and the importance of maintaining strict compliance measures.
Despite these challenges, Costco has maintained its core focus on providing members with quality goods and services at competitive prices. The company's membership format and ability to reinforce member loyalty through continuing fee revenue have been integral to its profitability. Additionally, Costco has achieved success in controlling costs, although some significant expenses, such as healthcare and utility costs, have been partially outside its control. This ability to manage costs while delivering value has been a key factor in Costco's long-term success and resilience in the face of various industry and regulatory challenges.
Conclusion
In conclusion, Costco Wholesale Corporation has firmly established itself as a retail powerhouse, driven by its unique business model, unparalleled value proposition, and unwavering commitment to its members. With a strong financial foundation, a proven track record of growth, and a management team dedicated to navigating challenges, Costco is poised to continue its trajectory as a leading player in the global retail landscape. The company's diverse product offerings, successful e-commerce expansion, and strategic warehouse growth underscore its adaptability and forward-thinking approach in an ever-evolving retail environment.