Could Costco Help You Become a Millionaire?

Costco (NASDAQ: COST) is a very well run company with a long history of success. And, if the fiscal second quarter of 2025 is any indication, the business continues to perform quite well. But just buying a good company isn't enough to ensure you get to millionaire status. You need the help of a good valuation, too. Here's why you need to be leery of buying Costco right now.

What does Costco do?

Costco is a club store. This is very different from a traditional retailer, where the store puts out products and, more or less, just hopes people show up to buy them. Costco's customers pay an annual membership fee for the privilege of shopping at its stores. Why would anyone want to do that? The answer is that Costco uses those membership fees to help it keep its own costs down. This is a very big deal.

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If you examine Costco's income statement you'll see two revenue sources. Net sales, which totaled about $62.5 billion in the fiscal second quarter, and membership fees, which tallied up to just under $1.2 billion. The biggest expense item is $55.7 billion related to merchandise costs, which is directly related to net sales. Then there's selling general and administrative costs of about $5.7 billion, which is what gets spent to run the company's stores. There are no material costs that are directly tied to membership fees.

Thus, membership fees fall almost entirely down into the gross profit figure of $2.3 billion. Or, to put that another way, membership fees account for more than half of Costco's gross profit. That's a huge percentage and shifts the company's goals dramatically. It is at least equally as important to keep members happy as it is to sell products.

But think about that for a second, what keeps members happy? Having good products at low prices. And that's exactly what Costco works hard to provide. Given the 90.5% renewal rate for memberships, it appears to be doing a good job of it. That flows through to the company's financial results.

Costco: Good news isn't always enough

Costco posted an adjusted same store sales advance of 9.1% year over year in the fiscal second quarter of 2025 (the main adjustments were to pull out the impact of gasoline price volatility and foreign exchange rates). Helping to drive that top line growth was a 5.7% increase in comparable traffic and a 3.2% increase in the average ticket. In other words, people are coming to the store more often and spending more when they do.

Costco continues to execute at the top of its game from a business perspective. Earnings, meanwhile, rose 8.4% year over year. Only the earnings advance was a touch shy of what Wall Street had been expecting. The actual miss was around $0.09 per share, roughly 2% lower than analyst estimates, which hardly seems like a huge deal. And still the stock fell dramatically following the earnings release on a day that the market rose.

COST data by YCharts

To be fair, it isn't uncommon for stocks that don't live up to Wall Street consensus estimates to fall. But Costco's fiscal second quarter 2025 earnings release was a pretty solid result given the strength of the underlying business. The real issue is that Costco is priced for perfection and perfection is not what investors got.

What does being priced for perfection look like? A stock price that is still, despite the big post-earnings decline, near all-time highs. In fact, as of this writing, the stock is within 10% of that high with the post-earnings decline representing most of that 10%. The stock's price-to-sales and price-to-earnings ratios are also elevated, with both near their all time highs, as well. The dividend yield is a miserly 0.5%, near the lowest levels in the company's history.

COST PE Ratio data by YCharts

Warren Buffett learned about value investing from Benjamin Graham, who is often looked at as the father of securities analysis. One of the most important lessons that Graham offered investors is to warn that even a great company can be a bad investment if you pay too much for it. Buffett has tempered the deep value approach favored by Graham and been very successful, but he still demands that the stocks he and his team buy trade at a reasonable price. It is hard to suggest that Costco is even reasonably priced given where its valuation metrics stand today.

Can Costco help make you a millionaire?

The answer is a resounding yes, but only if you pay a reasonable price. If you buy it while it is priced for perfection it might take a very long time for you to see a seven figure nest egg. And in between you might have to sit on material paper losses if investors' moods swing from overly enthusiastic to pessimistic.

On that score, Costco's stock has had multiple drawdowns where it fell between 20% and roughly 60%. This retailer probably has a place on your wishlist, but you might want think twice about putting it on your buy list right now.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.