Executive Summary / Key Takeaways

• Costco's membership-driven model continues to be its core strength, generating robust recurring revenue and fostering exceptional customer loyalty, which underpins its ability to offer compelling value and drive consistent sales growth.
• Strategic investments in operational technology, digital enhancements, and a global supply chain are fueling efficiency, enhancing the member experience, and expanding market reach, particularly in e-commerce and "big and bulky" item delivery.
• Despite macroeconomic uncertainties, including inflationary pressures and tariff impacts, Costco delivered strong financial results in fiscal year 2025, with net sales up 8% to $269.912 billion and net income increasing 10% to $8.099 billion.
• The company is poised for continued expansion, planning to open 35 new warehouses in fiscal year 2026, alongside ongoing efforts to mitigate cost pressures through strategic sourcing and maintain its competitive pricing authority.
• While membership renewal rates face a temporary slight decline due to a higher mix of online sign-ups, this trend is viewed as a net positive for attracting a younger demographic, with efforts underway to improve retention for this crucial cohort.

The Enduring Value Proposition: Costco's Core Business and Strategic Moat

Costco Wholesale Corporation, founded in 1983, has built an investment thesis around a simple yet powerful concept: offering members low prices on a curated selection of high-quality, nationally-branded and private-label products. This model, centered on membership warehouses, generates high sales volumes and rapid inventory turnover, enabling the company to operate profitably at significantly lower gross margins than most other retailers. The iconic $1.50 hot dog and soda combo, celebrating its 40th anniversary in fiscal year 2025, and the 30-year legacy of the Kirkland Signature private label brand, exemplify this unwavering commitment to member value.

In a retail landscape increasingly defined by intense competition, Costco's membership format stands as a formidable moat. The company competes globally with a diverse array of players, including supercenters like Walmart and Target (TGT), online giants like Amazon , traditional grocers such as Kroger (KR), and other warehouse clubs like Sam's Club and BJ's Wholesale Club (BJ). While competitors like Walmart leverage immense scale and a broad assortment, and Amazon dominates in digital convenience, Costco differentiates itself through a focused "treasure hunt" shopping experience and a deep emphasis on member loyalty. This loyalty translates into predictable, high-margin membership fee revenue, a distinct advantage over rivals reliant solely on merchandise sales. The company's limited SKU count, typically less than 4,000 active items per warehouse, further enhances its competitive position by allowing for volume purchasing and streamlined operations, which often results in superior pricing power and agility in a dynamic market.

Technological Edge: Fueling Efficiency and Member Engagement

Costco's operational prowess is increasingly augmented by strategic investments in technology, transforming how it serves members and manages its vast global network. The company's core technological differentiation lies not in a single product, but in its integrated systems designed to optimize efficiency and enhance the member journey.

A key initiative is the rollout of enhanced checkout technology in all U.S. warehouses. This system allows employees to scan small and medium-sized transactions while members are still in line, significantly speeding up the checkout process by requiring only payment at the cashier. This directly addresses a common pain point for members—long lines—and contributes to quicker parking space turnover, improving the overall in-warehouse experience. On the digital front, Costco is actively enhancing its e-commerce platforms with features like data augmentation for improved search effectiveness, passwordless sign-in to its mobile app, and virtual waiting rooms for high-velocity online items. These innovations are designed to reduce bot traffic, increase legitimate member access to popular products, and improve site stability during peak demand periods.

Costco Logistics represents a critical technological and operational differentiator, powering the company's growth in "big and bulky" online items. This integrated delivery service, which includes installation and haul-away of old items, has resonated strongly with members, contributing to a 13% increase in items delivered in Q4 fiscal year 2025 and marking 15 consecutive quarters of improved member experience scores. The Costco app's warehouse tool, allowing members to check local item availability and prices, garnered over 43 million visits in Q2 fiscal year 2025, demonstrating strong member adoption of digital tools for in-store shopping. Furthermore, the company is leveraging personalized messaging, sending multiple versions of its digital MVM (Multi-Vendor Mailer) based on members' previous shopping behavior, aiming for more relevant and targeted communications. In its pharmacy business, new prescription inventory management software and the enablement of prescription delivery via Instacart (CART) highlight a focus on leveraging technology for convenience and efficiency in ancillary services.

These technological advancements are not merely incremental improvements; they are foundational to Costco's competitive moat. They directly contribute to operational cost efficiencies, strengthen member loyalty by improving convenience, and drive e-commerce growth, thereby enhancing financial performance and market positioning. Emerging initiatives, such as the "buy now, pay later" offering through Affirm (AFRM) for Costco.com, and early-stage retail media campaigns (which have achieved 2-3 times the typical return on ad spend), signal a strategic intent to unlock new revenue streams and further deepen member engagement.

Financial Fortitude: Performance Amidst Dynamic Markets

Costco's financial performance in fiscal year 2025 underscores the resilience of its business model and the effectiveness of its strategic initiatives. The company reported net sales of $269.912 billion, an 8% increase over the prior fiscal year, driven by strong comparable sales and contributions from new warehouses. This growth translated into a 10% increase in net income, reaching $8.099 billion, or $18.21 per diluted share. Foreign exchange rates, however, presented a headwind, negatively impacting net income by $97 million ($0.22 per diluted share).

Membership fees, a high-margin and predictable revenue stream, continued their upward trajectory, increasing 10% to $5.323 billion in fiscal year 2025. This growth was fueled by new member sign-ups and the recent membership fee increases in the U.S. and Canada (effective September 1, 2024), which accounted for approximately 40% of the year's membership income growth. The company ended the fiscal year with 81 million total paid members, up 6.3%, and 145.2 million cardholders, up 6.1%. Executive memberships, representing 47.7% of paid members and 74.2% of worldwide sales, grew 9.3% to 38.7 million, reflecting the success of enhanced benefits like exclusive shopping hours and Instacart credits in driving upgrades.

Comparable sales for the full fiscal year increased 6% (or 8% excluding the impacts of gasoline price deflation and foreign exchange). This was supported by a 5% increase in shopping frequency and a 1% rise in average ticket size. E-commerce comparable sales demonstrated robust growth of 16% for the year, highlighting the increasing importance of digital channels.

Profitability metrics also showed strength. The gross margin percentage increased 20 basis points in fiscal year 2025, or 11 basis points excluding the impact of gasoline price deflation. Core merchandise categories saw a 19 basis point increase in gross margin, primarily driven by fresh foods and the co-branded credit card program. However, a $142 million LIFO charge due to higher merchandise costs negatively impacted the gross margin by seven basis points. Selling, General and Administrative (SGA) expenses as a percentage of net sales increased 11 basis points (or three basis points excluding gas deflation), primarily due to investments in employee wages, though strong sales leverage and productivity gains helped mitigate the impact.

Costco maintains a robust liquidity position, with net cash provided by operating activities totaling $13.335 billion in fiscal year 2025. Cash and cash equivalents stood at $14.161 billion at year-end. This strong cash flow, combined with available credit facilities, provides ample resources to fund ongoing operations, strategic investments, and shareholder returns, including a 12% increase in the quarterly cash dividend approved in April 2025. The company's long-term debt of $5.713 billion is modest relative to its total assets of $77.099 billion, indicating a healthy balance sheet capable of supporting future expansion without excessive reliance on external financing.

Strategic Growth Trajectory: Expansion and Innovation Ahead

Costco's outlook for fiscal year 2026 and beyond is characterized by a confident pursuit of strategic growth and continuous innovation, firmly rooted in its value-driven philosophy. The company plans to open 35 new warehouses in fiscal year 2026, including five relocations, a quicker pace than the 27 openings in fiscal year 2025. This expansion targets both existing markets, where new locations relieve pressure on high-volume warehouses and drive incremental business, and new international territories, where growth rates are often higher due to a smaller base.

Capital expenditure is projected to grow over 2025 and potentially outpace sales in 2026, reflecting significant investments in new warehouses, remodels to enhance existing facilities, depot expansions to optimize the supply chain, and manufacturing facilities for Kirkland Signature products. These investments are critical to maintaining a "best-in-class experience" for members and supporting the company's long-term growth.

Management remains agile in addressing macroeconomic uncertainties, particularly the evolving tariff environment. The strategy is to "minimize the impact of related cost increases to our members," with price increases considered a "last resort." This involves proactive measures such as moving production to different countries, consolidating global buying, and adjusting item assortments to lean into Kirkland Signature and domestically sourced goods. This offensive approach aims to maintain Costco's pricing authority and widen its value proposition against competitors.

While a slight decline in worldwide membership renewal rates is anticipated for "a few more quarters" due due to a higher mix of online sign-ups, this trend is viewed as a "net positive" for overall membership growth, as it attracts a younger demographic. The company is actively investing in improving auto-renewal and targeted digital communications to enhance retention for this new cohort. Starting with the September 2025 sales release, Costco will transition to reporting "digitally enabled comparable sales," a broader metric that includes all sales initiated online, reflecting the increasing importance of its digital ecosystem, which already totaled over $27 billion in fiscal year 2025.

Navigating Headwinds: Risks and Competitive Responses

Despite its robust position, Costco faces several pertinent risks and competitive pressures. The company's high dependence on its U.S. and Canadian operations, which collectively accounted for 86% of net sales and 84% of operating income in 2025, particularly California (26% of U.S. net sales), exposes it to regional economic shifts. The aggressive new warehouse openings, while strategic, carry the inherent risk of cannibalizing sales from existing locations, though management views this as a necessary step to improve member experience in crowded areas.

The retail sector remains intensely competitive, with rivals like Walmart (WMT) and Amazon (AMZN) possessing vast financial resources and advanced technological capabilities. Amazon, for instance, leads in innovation speed and e-commerce execution, potentially challenging Costco's digital growth. Lululemon (LULU)'s recent lawsuit alleging patent infringement on apparel designs highlights the ongoing competitive scrutiny in merchandise offerings. However, Costco's limited SKU count provides agility, allowing it to quickly pivot to alternative items if a product's value proposition is compromised, a flexibility that many broadline retailers lack.

Inflationary pressures, particularly in non-foods driven by imported items, pose a continuous challenge. While Costco recorded a $142 million LIFO charge in 2025, its strategy of working with suppliers, global sourcing, and leveraging Kirkland Signature products helps mitigate these impacts. The company's commitment to competitive employee compensation, while fostering high retention and productivity, also represents a significant and partially uncontrollable cost. Cybersecurity threats and payment-related risks are also growing concerns, necessitating continuous investment in IT systems and data protection.

Costco's strategic response to these challenges is multifaceted. Its membership model provides a stable revenue base that allows it to absorb some cost increases without immediately passing them to consumers, a qualitative advantage over many competitors. Investments in technology, such as enhanced checkout and Costco Logistics, directly address operational bottlenecks and improve member satisfaction, differentiating its in-store and online experience. By focusing on its core value proposition, expanding strategically, and leveraging its operational efficiencies, Costco aims to sustain its market leadership and continue delivering value to both members and shareholders.

Conclusion

Costco Wholesale Corporation stands as a testament to the power of a deeply ingrained value proposition and a relentless focus on the member. Its history of delivering high-quality products at competitive prices, cemented by the iconic Kirkland Signature brand and a loyal membership base, forms the bedrock of its investment thesis. Strategic investments in technology, from enhanced in-warehouse checkout systems to a sophisticated e-commerce logistics network, are not just keeping pace with industry trends but are actively shaping a more efficient and engaging member experience.

Looking ahead, Costco's planned expansion of 35 new warehouses in fiscal year 2026, coupled with its agile approach to managing macroeconomic headwinds like tariffs and inflation, signals a clear path for sustained growth. While competitive pressures from retail giants and the evolving digital landscape remain, Costco's unique membership model and operational efficiencies provide a distinct advantage. The company's ability to consistently generate strong cash flow and prioritize member value, even if it means absorbing costs, reinforces its position as a resilient and compelling investment in the consumer defensive sector.