3 Must-Know Facts About Costco Before You Buy the Stock

Costco (NASDAQ: COST) is a massive business. In fiscal 2025 (ended Aug. 31), it registered $270 billion in net sales. This huge sum makes it the world's third-biggest retailer, behind only Walmart and Amazon.

Costco shares have historically performed very well. Over the past decade, for example, they're up 429% (as of Dec. 23), providing a nice boost to investor portfolios. The retail stock is down 7% in 2025, though.

Before you hit the buy button, here are three must-know facts about Costco.

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1. Costco's memberships are its money maker

Through its 921 warehouse clubs, Costco sells merchandise ranging from groceries and apparel to electronics and home goods. But making lots of money on merchandise sales isn't Costco's key focus. The gross margin was just 11.3% in Q1 2026 (ended Nov. 23), which reveals that management implements low mark-ups on its inventory. Retail peers typically have much higher mark-ups on their goods.

Instead, Costco runs a thriving membership model. Consumers must pay an annual fee to enter a warehouse and shop for items. Costco's membership count grew 5.2% year over year to 81.4 million in the last quarter, helping increase membership income to $1.3 billion. The worldwide renewal rate usually hovers around 90%, showcasing strong loyalty.

Memberships introduce a high-margin and recurring revenue stream. And they have proven pricing power. They also drive customers to visit stores more frequently, so they feel that the annual fee is worth it. This might explain why Costco has a stellar track record of posting same-store sales growth.

2. Having a massive scale helps tremendously

Great businesses are those that have economic moats, a term popularized by Warren Buffett. Costco excels in this area. Its moat is supported by a powerful cost advantage. Credit directly goes to the company's incredible scale, as demonstrated by the previously mentioned fiscal 2025 net sales of $270 billion.

The average Costco club has about 4,000 stock-keeping units (SKUs). This is a significantly smaller number than the 30,000 SKUs a normal supermarket might carry. As a result of a narrow product focus, Costco buys large quantities of a limited number of goods. This gives it immense buying powerful and negotiating leverage over its supplier base, leading to low costs and everyday savings for shoppers. This cost advantage only improves over time, as greater sales support more supplier leverage that leads to ongoing savings. It's a positive feedback loop.

3. Even after a stock dip, the shares are expensive

Since hitting a peak in February 2025, shares have fallen 21%. That drop has occurred despite Costco putting up solid financial results that don't indicate at all that it's losing its competitive edge. Investors might be interested in buying the dip.

The valuation still doesn't look like a bargain, though. Investors can purchase the stock if they are willing to pay a price-to-earnings (P/E) ratio of 45.7. This is an 81% premium to the S&P 500 index. Value investors might not be comfortable with this setup, as it evidently provides no margin of safety.

There's an optimistic view that investors can adopt as well. Perhaps the market will always give Costco a higher valuation because it's a durable, predictable, and stable business. This seems to have always been the case, as the financials are robust. Net income soared 241% between fiscal 2015 and fiscal 2025. Costco continues to open about 25 new stores each year, too.

It's impossible to accurately assess market sentiment to figure out what the right valuation should be. But I believe there is some merit to the argument that Costco shares will never trade at an optically cheap P/E multiple.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, and Walmart. The Motley Fool has a disclosure policy.