Membership Has Its Privileges

Costco.

In 1976, Costco was founded initially as Price Club in San Diego. Then, in 1993, the company merged with Costco, forming the retail giant Costco Wholesale Corporation. With its headquarters in Issaquah, Washington, Costco operates in a highly competitive retail and wholesale club industry. With over 900 warehouses across the globe, Costco has grown into one of the largest global retailers renowned for its membership-based model. The company offers high-quality goods at low and reliable prices in a warehouse setting.

The company’s mission is to “continually provide our members with quality goods and services at the lowest possible prices.” In the Nick Sleep's letters, he notes that consumers have chosen Costco as their spot, not only because they sell all the name brand products but because the prices are reliable at a fixed rate, usually at no more than 15% of what the company paid for. Costco has grown its e-commerce business at an exceptional rate growing by 13% in its most recent quarter, driven by improved logistics and enhanced digital infrastructure. Costco’s private label Kirkland has been very successful and a key revenue driver for the company, representing a major portion of the company’s total sales.

Costco has added over 25 warehouses in 2024 with plans to continue to expand its global footprint, particularly in high-growth international markets. Costco also grew its membership fee income by 7.8%, with renewal rates exceeding 90% which reflects incredible customer loyalty. Costco’s strategic vision revolved around scaling its membership, price leadership, and leveraging technology to create seamless customer experiences. Costco has also begun to prioritize sustainability by reducing packaging waste and improving its energy efficiency across the company’s supply chain. 

We believe Costco is worth analyzing due to its strong business model, global growth potential, operational excellence, resilient consumer demand, and digital transformation. Costco’s low-cost high-volume model provides them a strong defensive moat during uncertain economic times, with its membership fees creating strong recurring revenues. Costco is well-positioned to capture market share due to its global expansion plans in emerging markets. The company’s growing e-commerce operations show Costco's ability to adapt to changing consumer behaviors, which will strengthen the company’s long-term profitability. Costco has shown strong operational ability through its ability to maintain high efficiency, favorable supplier terms, and minimize its costs to keep its strong profitability. 

Costco’s recent financial results demonstrate strong business and operational efficiency. In its most recent quarter, the company achieved a revenue of $61 billion in net sales, representing an impressive growth of 7.5% year over year growth. Costco also reported a strong net income of $1.8 billion, reflecting a 13.2% growth. Costco improved its gross margin by 24 basis points year over year to 11.28%, from operational efficiencies in its private label products and digital sales. The company’s net profit margin hovered around 3%, which aligns with Costco’s low-margin, high-volume business model. 

Costco’s valuation reflects it is trading at a premium compared to other industry peers. With a current PE ratio of 40x and EV/EBITDA of 23x, reflecting investor confidence in the firm's recurring revenue model and membership-driven growth. Its price-to-book ratio also reflects the confidence of the market in its asset efficiency and steady cash flow generation. Costco had a strong operational cash flow exceeding $8 billion in 2024, built by its strong membership renewals and consistent revenue streams

Costco is the king of the retail and wholesale club industry, a market segment where economies of scale, cost leadership, and customer loyalty define success. Several companies try to compete with Costco such as Walmart, Amazon, Target, and regional players like BJ Wholesale Club. Costco has carved out a gigantic niche for itself with over 77 million members, which drives recurring revenues while fostering unmatched customer retention. With over 900 warehouses worldwide, Costco has been able to distinguish itself by offering a high-value shopping experience where customers can purchase goods in bulk at industry-leading prices. Costco’s private label, The Kirkland Signature brand accounts for nearly 25% of the company’s total sales. Kirkland offers high-quality alternatives to national brands at lower prices, covering a wide array of categories from groceries to household goods. 

Costco’s success is deeply rooted in the company’s leadership and strategy. Craig Jelinek the company's former CEO helped expand the company into a global giant and evolved its business model to embrace e-commerce. The company’s CFO, Richard Galanti has been with the company for over 40 years and is known for his conservative financial management and focus on cash flow optimization. Ron Vachris the company’s COO has been instrumental in ensuring the company's warehouses remain operationally efficient and strategically located. The Costco leadership team has consistently been able to execute long-term goals while navigating a competitive market. 

Costco has thrived in a market where its competitors are well-funded and customers are price sensitive. Walmart’s scale allows it to operate similarly to Costco due to its scale and low pricing strategy. Amazon has the largest e-commerce market share due to its extensive product catalog and delivery speeds along with its subscription service. Target appeals to style-conscious and convenience-oriented shoppers. Meanwhile, BJ’s Wholesale Club mimics Costco’s model with membership and private label offerings. Costco currently leads the wholesale club segment with over 50% market share, showing its dominance over the market. 

Over the years Costco has been able to create a strong economic moat built around its membership loyalty, economies of scale, Kirkland signature brand, operational efficiency, global expansion, and digital transformation. Costco’s scale has enabled it to create purchasing power that enables it to negotiate terms with suppliers, allowing for lower costs passed on to its customers and healthy margins. Costco’s membership model is one of the company's crown jewels with membership renewal rates over 90%, reflecting a customer base that sees the value in the company. Costco’s international growth has shown to be successful in markets like Asia and Europe, ensuring a long-term revenue pipeline. 

Costco’s organic growth strategy is rooted in its expanding membership base, increase in same-store sales, and consistently innovating to elevate the customer experience. Costco aims to add 20 new warehouses globally in 2025, targeting emerging market segments offering substantial potential for market share expansion. Costco has begun to build a robust online presence by investing heavily in its website functionality, seamless delivery options, and diversifying its digital product portfolio. The company’s ability to leverage its existing business model while exploring new opportunities positions it for sustained growth.

Costco has predominantly relied on organic growth initiatives in the company's history, but they have pursued acquisitions and strategic alliances to create strong operational efficiencies and an increased geographical presence. In 2016 Costco acquired Bargain Wholesale to strengthen its procurement and supply chain operations to create cost-efficiency and a larger product diversity. Then in 2020, they acquired Innovel Solutions for $1 billion to enhance the company's deliveries for large items and e-commerce fulfillment capabilities. Costco has also built strategic partnerships with third-party delivery services to expand the company’s reach into urban markets. Also in emerging markets to help Costco navigate local regulations and accelerate its penetration into high-growth regions like India and Southeast Asia. 

Costco has several key drivers that could propel its growth in the near term to ensure its long-term scalability. Currently, Costco only has 175 warehouses outside of the United States in markets like China, India, and Southeast Asia where they believe growth will exceed expectations. Costco has also begun to invest heavily in technology advancements that will enable it to create automated supply chains and advanced data analytics to improve personalized experiences. Its acquisition Innovel Solutions has enabled Costco to reduce delivery times for large items, streamline inventory management, and cut transportation costs.

Costco is well-positioned to capitalize to continue to capture market share as it benefits from evolving market dynamics, its operational efficiency, and its strong brand reputation. The global wholesale and retail market is expected to grow at a CACR of 6% through 2030, this represents a major opportunity for Costco to increase its market share. Costco’s push into China has been very successful, with its membership sign-ups and sales have exceeded projections. Costco has shown strong resilience post-pandemic from the accelerated demand for e-commerce adoption and increased consumer preferences for buying items in bulk. Costco has been able to build high-performing warehouses with expanding manufacturing capabilities through its Kirkland products enabling them to maintain its cost leadership advantage. 

Costco’s efficient operations are key to the company’s success, but several risks could disrupt the company's success including supply chain disruptions, logistical challenges, management risks, and its warehouse operations. Costco’s reliance on a global chain makes it vulnerable to challenges like transportation delays, geopolitical tenses, or labor shortages which could lead to stockouts or increased costs. Also as Costco expands its operations globally it faces the risks that come with managing culturally diverse teams and regulatory environments that could hurt the company’s ability to execute. Costco relies heavily on its warehouses for its revenue any issues like labor strikes, natural disasters, or operational inefficiencies could directly impact its revenue. 

In a highly competitive industry, Costco faces constant pressures from market dynamics that include regulatory changes, competition, demand fluctuations, and foreign exchange risks. Costco’s global footprint exposes them to ever-changing trade policies, tariffs, and environmental regulations could could lead to increased costs. Intense competition from Walmart, Amazon, and BJ’s Wholesale creates pressure on customer retention, pricing, and market share with the evolution of e-commerce further intensifying competition. Economic downturns or shifts in consumer behavior could reduce discretionary spending, impacting Costco’s revenue in non-essential categories. 

Costco’s scale and operations could expose them to potential legal challenges. Costco has faced several lawsuits related to alleged labor violations, including failure to pay overtime or comply with worker safety standards. Environmental groups have also targeted Costco for issues related to sustainable sourcing of products like seafood and palm oil. While these cares may not be materially significant, they could damage the company’s reputation if mishandled. Kirkland Signature also faces risks due to liability claims, and food safety as the label represents a major percent of the company's revenue. 

As one of the most valuable companies in the retail industry, Costco’s valuation and stock are susceptible to volatility from internal and external factors. With higher valuation multiples than its competitors, any earnings miss or downturn in expected growth could lead to a stock price decline and hurt investor sentiment. Rising interest rates could hurt Costco’s valuation by reducing the attractiveness of equities relative to fixed-income assets. Broader market downturns or economic recessions could hurt Costco’s stock price as investors may reassess spending patterns. 

Costco Wholesale Corporation is a retail juggernaut with a track record of providing value to its shareholders through its membership-based model and generating high-margin recurring revenues. Costco has created strong customer loyalty through its continued commitment to low prices and high-quality private-label products. Costco’s global expansion, focus on sustainability and operational efficiency have given them a durable moat to navigate competitive pressures. Its expansions into emerging markets like China have been very successful as well as its continued momentum in the digital space. Costco has sustained double-digit growth in its e-commerce segment reinforcing the company’s adaptability to shifting consumer behaviors. 

The bad boys over at Azar Capital Group will be giving Costco a ‘BUY’ rating due to its consistent growth and defensive business model. With its strong revenue growth from warehouse expansions, membership fees, and the growing Kirkland Signature brand Costco is well positioned. While its premium valuation may deter some investors, the company’s continued execution, customer loyal base, and ability to adapt to market dynamics make it an excellent investment for long-term growth. Its investments in renewable energy and eco-friendly products could attract customers seeking sustainably made goods to enhance Costco's competitive positioning.  

Disclosure

This analysis is for informational purposes only and should not be considered financial advice. Investors are encouraged to perform their own due diligence or consult with a financial advisor before making investment decisions.