My Honest Take on Costco's Latest Earnings Report

Key Points

• Costco delivered steady revenue and net income growth in fiscal 2025.

• The company's P/E ratio is well above those of its nearest peers.

• It's not clear that Costco can or should try to accelerate its expansion.

• 10 stocks we like better than Costco Wholesale ›

Costco Wholesale (NASDAQ: COST) just released its earnings for the fourth quarter of fiscal 2025 (ended Aug. 31). For the fiscal year, the company reported impressive net sales growth, particularly given the uncertain economy and concerns about tariffs.

Unfortunately for prospective investors, Costco's steady, consistent performance is a known quantity. That forces new buyers and even current shareholders to face a brutal truth about the retail stock.

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The difficult truth about Costco's stock

Investors need to acknowledge that Costco's growth rate does not justify its stock price.

First, its growth is robust for a mature retailer. In fiscal 2025, revenue of $275 billion grew by 8%. Although this included a membership price increase from $60 to $65 per year in the U.S., which accounts for just over two-thirds of all Costco warehouses, membership fee revenue grew by only $495 million during the fiscal year. Costco added a net 24 new locations during the fiscal year, a nearly 3% rise that took its total number of warehouses to 914.

Amid that growth, operating income was 12% higher, though income tax expenses rose by 15%. Hence, during the same timeframe, net income increased by 10% to $8.1 billion.

Such growth should not change the long-term investment thesis on Costco, but conditions likely make it more of a hold than a buy. Over the last year, its stock price moved higher by only about 2% as of the time of this writing.

A significant factor in that performance is likely its valuation. Its current price-to-earnings (P/E) ratio is 52, down from a peak of 63 in February. Still, that is far above the S&P 500 average of 31 and well above that of its major competitors.

COST PE Ratio data by YCharts.

Why the investment case is unlikely to improve

As implied before, Costco's financial performance will probably draw interest from some investors, at least until they realize it is unlikely to fall to a reasonable valuation.

Since it continues to execute well, the likelihood of Costco even falling to Walmart's current 39 P/E ratio is uncertain. It has not traded at BJ's Wholesale's current earnings multiple of 21 since just after the financial crisis, so investors are unlikely to buy this company at a bargain price.

Investors should also not expect a more rapid expansion. Indeed, Costco has continued to move into new U.S. metros and has attracted shoppers in foreign markets without any major hiccups. In comparison, retailers such as Walmart and Home Depot failed to match Costco's success internationally.

Nonetheless, Costco plans a net increase of 30 warehouses in fiscal 2026, which is an increase of less than 3%. Given its potential for domestic and international expansion, one might presume it could grow faster. Still, well-executed slow growth is probably better for investors than rapid growth done poorly. Thus, it is not clear that investors should push for that.

Plus, making Costco more of a dividend stock is unlikely to change its investment thesis. Its current payout of $5.20 per share annually has a dividend yield of 0.50%, far below the S&P 500 average of 1.20%. While it mitigates the low payout with a generous special dividend every few years, that is likely not enough to persuade investors to buy Costco stock for dividend income.

Admittedly, the payout could rise significantly. Costco generated $7.8 billion in free cash flow in fiscal 2025, well above the $2.2 billion it paid out in dividends over that time. However, even if it doubled dividend payments, it would lag the market average. Increasing the yield to 2% would also presumably claim all of its free cash flow, meaning Costco is unlikely to become an attractive income stock.

Investing in Costco stock

Ultimately, new investors will have to resign themselves to paying what is likely an excessive premium to own Costco stock under current conditions.

The problem goes beyond paying 52 times earnings for 10% net income growth. Given its performance, most analysts have to acknowledge that its current approach works well for the company, and it is not clear that trying to grow its warehouse count faster would pay off for investors.

Moreover, the free cash flows are not sufficient to turn Costco into a lucrative dividend stock, and its current 0.50% dividend yield is probably not high enough to bolster the overall case for Costco stock.

Hence, if investors are unwilling to pay a high price for comparatively low returns, they should refrain from adding shares of Costco stock.

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Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Home Depot, and Walmart. The Motley Fool has a disclosure policy.