Costco (COST) Shows Why It’s The King Of Retail

A record-breaking $2.9 million opening day at Costco’s (COST) newest warehouse in Pleasanton, California, tells you everything you need to know about this retail powerhouse.

The company just reported stellar Q1 2025 earnings that beat estimates while traffic grew an impressive 5.1% globally.

Financial pros have taken notice, with Costco ranking as the third most searched discount retailer according to our TrackStar data.

The question is whether Costco can maintain its momentum in an increasingly competitive retail landscape.

Costco’s Business

Costco revolutionized retail with a business model built on charging membership fees to access bulk products at razor-thin margins.

The company operates 897 warehouses across multiple countries, serving 77.4 million paid household members who make up a loyal customer base willing to pay annual fees for access to its curated selection of high-quality products at competitive prices.

Costco segments its business into the following areas:

• U.S. Operations (73% of total revenues) – Core retail operations across the United States including warehouses, e-commerce, and ancillary businesses
• Canadian Operations (14% of total revenues) – Warehouse clubs and related operations throughout Canada
• Other International (13% of total revenues) – Operations in markets including Mexico, Japan, UK, Korea, Taiwan, Australia, Spain, and France

Q1 2025 delivered outstanding results with revenue up 7.5% to $62.2 billion while earnings per share reached $4.04, well above estimates of $3.79.

The company allocated substantial capital to digital technology upgrades, which improved search functions and inventory visibility in its mobile app.

Management plans to open 29 new locations in fiscal 2025, with ten sites outside the U.S. This expansion follows recent successes like the Pleasanton, California warehouse, which set a U.S. opening day sales record of $2.9 million.

Financials

Source: Stock Analysis

Costco’s financial performance continues to impress, with steady revenue growth averaging 10.8% annually over the past five years.

The company maintains stable margins despite inflationary pressures, with gross margins at 12.7% and operating margins at 3.7% in the trailing twelve months.

Free cash flow generation remains strong at $5 billion TTM, though it’s down from the previous year’s $6.7 billion due to increased capital expenditures for expansion.

The company recently increased its quarterly dividend by 13.5% to $4.50 per share, marking its 14th consecutive annual increase.

Costco’s core business model remains resilient with membership fee income up 7.8% year-over-year to $1.17 billion and renewal rates holding steady at 92.8% in the U.S. and Canada.

Valuation

Source: Seeking Alpha

Costco commands premium valuations compared to peers, trading at 59.3x TTM earnings versus 38.5x for Walmart and 14.3x for Target.

The company’s price-to-sales ratio of 1.7x also reflects this premium, which is significantly higher than Walmart’s at 1.1x and Target’s at 0.6x.

While these multiples might seem steep, Costco’s superior business model, consistent execution, and highly predictable membership revenue stream warrant these valuations.

Growth

Source: Seeking Alpha

Costco’s revenue growth of 5.4% year-over-year outpaces Target’s 0.6% but matches Walmart’s 5.5%.

Looking forward, analysts expect 6.4% growth, ahead of Target’s -0.1% and Walmart’s 5.2%.

The company’s three-year revenue CAGR of 8.4% demonstrates consistent growth even through challenging retail environments.

Profitability

Source: Seeking Alpha

Costco’s profitability metrics trail some competitors, with gross margins of 12.7% compared to Walmart’s 24.7% and Target’s 28.4%.

However, this is by design, as Costco’s membership model allows it to operate with lower margins while generating predictable revenue streams from fees.

The company’s return on equity of 30% and return on assets of 10.1% demonstrate efficient capital allocation despite the lower margins.

Our Opinion 9/10

Costco exemplifies retail excellence with its membership-based model, which generates predictable cash flows and loyal customers.

Despite premium valuations, the company’s consistent execution, expansion plans, and steady dividend growth make it an attractive long-term investment.

With strong traffic growth, increasing membership income, and successful digital initiatives, Costco shows no signs of slowing down.