Costco: A "buy and hold" stock, according to Charlie Munger.

Costco is one of the world’s leading retailers, known for its membership-based warehouse model that combines value, quality, and efficiency. With over 900 warehouses globally, the company has built a reputation for offering high-quality products at unbeatable prices while maintaining exceptional customer loyalty through its paid membership structure. Its private label brand, Kirkland Signature, has become a symbol of trust and value, helping Costco stand out in an intensely competitive retail landscape. The late Charlie Munger once stated, “I love everything about Costco. I’m a complete addict, and I will never sell a share.” That sentiment captures the admiration many investors have for Costco’s business model and disciplined management. The question is, does this retail powerhouse still deserve a place in your portfolio today?

This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me. 

For full disclosure, I should mention that I do not own any shares in Costco at the time of writing this analysis. If you would like to copy or view my portfolio, you can find instructions on how to do so here. If you want to purchase shares or fractional shares of Costco, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

Costco Wholesale Corporation, headquartered in Washington, United States, is one of the world’s largest retailers. Founded in 1983, the company operates a global network of membership-only warehouse clubs and e-commerce platforms, offering a limited selection of branded and private-label merchandise at consistently low prices. Its business model is built on high sales volumes, rapid inventory turnover, and operational efficiency, which allow it to maintain low margins while still achieving strong profitability. Costco’s appeal lies in its ability to deliver quality at a value. Members pay annual fees to access bulk discounts on a wide range of products, from groceries and household essentials to apparel, electronics, and health products. Membership income is a key part of its profitability, providing a recurring and stable revenue stream that helps balance the low margins of its retail operations. As of fiscal year 2025, Costco operated 914 warehouses across North America, Asia, and Europe, alongside e-commerce sites in eight countries. Ancillary services such as gasoline stations, optical and pharmacy departments, food courts, and Costco Travel encourage frequent member visits and deepen engagement. The company’s private-label brand, Kirkland Signature, has become a symbol of quality and trust, often matching or surpassing national brands while remaining competitively priced. Costco’s competitive moat is built on its cost efficiency, membership loyalty, scale, and company culture. Its large buying power allows it to negotiate better terms with suppliers than most competitors. The company’s simple operations, limited range of about 4.000 products compared to roughly 40.000 in a typical supermarket, and straightforward warehouse design keep operating expenses low. These efficiencies are passed directly to members through lower prices, reinforcing Costco’s reputation for value and encouraging repeat purchases. The membership-based model creates a powerful cycle: members pay to save, which increases their incentive to concentrate spending at Costco. This self-reinforcing structure supports high renewal rates and strong sales volume. In 2025, renewal rates reached 92,3 percent in the U.S. and Canada and 89,8 percent worldwide, reflecting exceptional loyalty. Membership fees alone accounted for a large share of Costco’s net income, while its retail operations are designed to run on thin margins to maintain trust. Costco also benefits from what’s known as the treasure-hunt shopping experience, where part of its product range changes regularly to create a sense of discovery. Seasonal items, limited-time offers, and unexpected bargains encourage impulse purchases and frequent visits, adding excitement to each trip and strengthening engagement. Its reputation for fairness and quality extends to both its products and its people. Costco is known for paying above-average wages, offering strong benefits, and promoting from within. This results in low employee turnover, high morale, and strong customer service, which all contribute to consistency and member satisfaction.

Management

Ron Vachris serves as the CEO of Costco, a role he assumed on January 1, 2024. His leadership reflects both continuity and evolution, as he carries forward Costco’s longstanding commitment to providing high-quality goods at the lowest possible prices while guiding the company through a new phase of global and digital expansion. Ron Vachris’s career with Costco spans more than four decades and began when he joined the company at age 17 as a forklift driver. Over the years, he has held nearly every major operational and merchandising role, gaining a deep, hands-on understanding of Costco’s business model and culture. Throughout his tenure, Ron Vachris has built a reputation for operational excellence, pragmatic leadership, and an unwavering focus on member value. He has served in several key roles, including Senior Vice President of Real Estate Development, General Manager of the Northwest Region, and Executive Vice President of Merchandising. Before becoming CEO, he served as President and COO from February 2022, where he played a central role in overseeing global operations and implementing initiatives that enhanced efficiency and member satisfaction. Ron Vachris also serves on Costco’s Board of Directors. His appointment continues Costco’s tradition of steady leadership, as he is only the third CEO in the company’s history. This stability reflects Costco’s culture of promoting from within and valuing long-term experience over short-term results. Under his leadership, Costco remains deeply rooted in its founding principles of simplicity, trust, and member focus, while embracing opportunities in e-commerce, digital tools, and international growth. Ron Vachris is known for his humble leadership style and strong connection to Costco’s employees and members alike. He often emphasizes that the membership card is Costco’s most important product, symbolizing the company’s value proposition and relationship with its customers. His approach combines operational discipline with a people-centered philosophy shaped by his early experiences on the warehouse floor. While Ron Vachris’s tenure as CEO is still in its early stages, his extensive operational background and deep understanding of Costco’s culture position him well to lead the company into its next chapter. His focus on disciplined growth, member satisfaction, and employee engagement ensures that Costco’s founding mission, to deliver the best possible value to its members, continues to guide every aspect of the business.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Costco has maintained a high ROIC for many years because its business model is designed for efficiency, consistency, and long-term profitability. The company generates strong returns by selling products quickly, keeping expenses low, and earning steady income from membership fees. One of the main reasons Costco achieves such strong returns is the way its business runs day to day. The company sells products very quickly, often before it needs to pay its suppliers. This means that less money is sitting in unsold goods, and more can be used to support growth and keep prices low. Membership income also plays a major role. The annual fees paid by members have very few related costs, so most of this income contributes directly to profit. As the number of members continues to rise, and as more of them upgrade to Executive memberships with higher annual fees, this recurring revenue has become an increasingly important driver of profitability and return on capital. Costco’s growth strategy further supports high returns. Rather than expanding aggressively or taking on unnecessary risks, the company opens new warehouses at a steady pace of about 20 to 25 per year, focusing on markets with proven demand. Each new location typically reaches profitability quickly because of Costco’s strong brand reputation and loyal membership base. Operational efficiency is another critical factor. Costco keeps its product range small, purchases directly from suppliers, and operates with a simple warehouse layout. These choices reduce costs related to logistics and staffing while maintaining very high sales volumes per warehouse. The combination of efficient operations and disciplined spending allows the company to earn strong returns on every dollar it invests. In fiscal year 2025, Costco’s ROIC reached a new high thanks to higher operating income, record membership fee revenue, and continued efficiency in managing inventory and supplier payments. Looking forward, Costco’s ROIC is expected to remain strong. The company’s structure naturally supports high returns through steady membership income, efficient operations, and a disciplined approach to growth. While further improvement may be gradual, Costco’s returns are likely to stay well above most other large retailers.

The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. To put it simply, equity is the part of the company that belongs to its shareholders – like the portion of a house you truly own after paying off part of the mortgage. Growing equity over time means the company is becoming more valuable for its owners. So, when we track book value plus dividends, we’re essentially looking at how much value is being built for shareholders year after year. In Costco’s case, the numbers show how consistently the company has built value for its shareholders over time. There have been years of strong growth and a few where the pace slowed, but the overall trend is clearly upward. The slight decline in 2025 compared to 2024 does not mean the business performed poorly; it simply reflects that 2024 was an unusually strong year, partly due to the one-time special dividend that made the comparison tougher. Over the past decade, Costco’s equity has generally grown at a healthy pace thanks to rising earnings, steady expansion, and efficient use of capital. Periodic dips are mostly linked to years when the company returned large sums to shareholders, rather than any decline in its underlying strength. The pattern shows a company that generates more cash than it needs and regularly chooses to share that excess with its shareholders through dividends. Looking ahead, Costco’s equity will likely keep increasing as the company opens new warehouses, grows its membership base, and continues to produce solid profits. The pace may fluctuate from year to year, especially if another special dividend is paid, but the long-term direction should remain positive.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Costco consistently generates strong free cash flow because of its efficient business model, steady membership income, and disciplined approach to spending. The company converts a large share of its earnings into cash because it turns over inventory quickly, collects cash from sales immediately, and often pays suppliers later. This creates a favorable cash flow cycle where money comes in faster than it goes out. However, Costco’s levered free cash flow margin appears relatively low compared to many other large companies. This is largely a result of its business model. Costco operates with very low profit margins by design, choosing to pass most of its cost savings on to members through lower prices. Its focus on volume and value means it earns less on each dollar of sales, even though the overall cash generation remains very strong due to the sheer scale of the business. In fiscal year 2025, Costco generated the highest free cash flow in its history. This was mainly because the company earned more from its operations, grew its membership income, and managed its cash flows very efficiently. Sales per warehouse continued to increase, and international growth added further momentum. Even though Costco spent more on new warehouses and upgrades during the year, the strong cash coming in from its core business more than offset those investments, resulting in record free cash flow. Management explained in the earnings call that capital expenditures grew faster than sales in 2025 for the first time in several years. This was mainly due to investments in new warehouses, remodeling older locations, expanding depots to support e-commerce, and developing manufacturing capacity for Kirkland Signature products. Costco also continues to invest in technology to improve the online shopping experience and strengthen member engagement. These investments are expected to continue in 2026, with capital expenditure likely to grow slightly faster than sales again as Costco focuses on supporting future growth. Costco uses its free cash flow in a very shareholder-friendly way. The company consistently returns a portion of it through regular quarterly dividends and periodic special dividends, such as the large one paid in 2024. At the same time, it reinvests heavily in opening new warehouses, upgrading existing ones, and expanding its e-commerce and logistics infrastructure. Looking ahead, Costco is expected to keep generating strong free cash flow. Its membership fees provide a steady stream of cash each year, and the company’s efficient way of running its business ensures that plenty of money continues to flow in, even when it is investing heavily in new warehouses or upgrades. The free cash flow yield suggests that the stock is currently trading at a premium valuation. However, we will revisit valuation later in the analysis.

Debt

Another important factor to consider is the level of debt and how manageable it is. A useful way to assess this is by asking whether the company could repay all its long-term debt within three years, based on current earnings. For Costco, this calculation results in a debt-to-earnings ratio of 0,7 years, well within the three-year threshold. This indicates that debt is not a concern when evaluating Costco as an investment. Interestingly, Costco has not had a debt-to-earnings ratio above three years since 1996. This long record of financial discipline suggests that debt is unlikely to become a significant risk for the company in the future.

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Risks

Competition is a risk for Costco. The retail industry is constantly evolving, and Costco operates in one of the most competitive environments in the world. The company faces pressure from several directions: warehouse clubs like Sam’s Club and BJ’s Wholesale Club, general retailers such as Walmart, Target, and Kroger, online giants like Amazon, and hard discounters and specialty stores that target specific product categories. This broad range of competitors means Costco must continually defend its market share across multiple fronts, pricing, product quality, convenience, and service. One of Costco’s biggest strengths, its low-price model, also makes it vulnerable in a highly competitive landscape. The company depends on high sales volumes and rapid inventory turnover to sustain its low prices. If competitors become more aggressive with pricing or promotions, especially in key categories like electronics, appliances, and groceries, Costco may feel pressure to match those discounts, which could narrow its margins. Sam’s Club, for instance, has recently improved its stores and digital capabilities and has run promotional campaigns offering discounted memberships to attract Costco’s members. Amazon represents another major competitive threat. Its vast resources, advanced technology, and deep data insights enable it to compete on convenience, personalization, and speed. Amazon’s growing strength in grocery delivery and subscription-based bulk shopping overlaps directly with some of Costco’s core categories. As online and mobile shopping continue to grow, the ease of price comparison and home delivery could make it harder for Costco to maintain its traditional warehouse advantage if it does not continue investing in digital capabilities. Competition also extends beyond customers to employees, suppliers, and locations. Costco must compete to attract and retain skilled employees, secure favorable supplier relationships, and access prime real estate for new warehouses. Competitors with larger financial resources or stronger technology capabilities could outpace Costco in these areas.

Macroeconomic factors are a risk for Costco. As a global retailer with a low-margin, high-volume business model, Costco is closely tied to overall economic conditions. Changes in inflation, interest rates, energy prices, and consumer confidence can significantly affect both its costs and its sales. Inflation is one of the biggest challenges. When prices for goods, wages, energy, and transportation rise, Costco’s expenses increase. Because the company prioritizes offering the lowest possible prices to its members, it is often reluctant to raise prices quickly, which can temporarily squeeze profit margins. Conversely, in a deflationary environment Costco’s sales growth can appear weaker even if customers are buying the same amount of products. This happens because lower prices mean the total money collected from sales decreases, even though the volume of goods sold stays about the same. Fluctuating commodity prices add another layer of uncertainty. Volatility in fuel, food, and raw material costs can impact both Costco’s merchandise prices and its operational expenses. Since the company operates on thin margins, even small shifts in input costs can have a noticeable effect on earnings. Management has shown strong discipline in mitigating these pressures through efficiency improvements and close cooperation with suppliers, but not all cost increases can be absorbed or offset. Economic cycles also influence consumer behavior. In periods of economic slowdown or rising unemployment, customers may focus on essential goods while cutting back on discretionary purchases like electronics, home goods, or apparel, categories that typically have higher margins. A severe downturn could also pressure Costco’s membership model if financially strained households delay renewals or opt for lower-tier memberships. Another risk stems from Costco’s heavy reliance on North America. The U.S. and Canada together account for more than 85% of the company’s net sales and operating income, with California alone contributing more than a quarter of U.S. sales. This concentration means that regional economic conditions, such as changes in housing markets, labor costs, or consumer spending, can disproportionately affect results.

Failure to maintain membership growth is a risk for Costco. The company’s entire business model depends on its ability to attract, retain, and expand its base of paying members. While membership fees make up less than 2% of total revenue, they contribute a much larger share of total profits because Costco’s retail operations run on extremely thin margins. In other words, membership fees are what allow Costco to keep prices low while still generating strong overall profitability. If membership growth slows or renewal rates decline, the company could lose one of its most stable and high-margin income streams. Membership growth and loyalty are at the heart of Costco’s success. Increasing the number of members, and especially the proportion of higher-paying Executive members, is vital to maintaining profit growth. Executive members not only pay a higher annual fee but also tend to spend significantly more, making them a key driver of both sales and profitability. A slowdown in new member sign-ups or a decline in upgrades could lead to weaker sales momentum and lower membership income. Renewal rates are equally important. Costco’s exceptionally high renewal rates, over 92% in the U.S. and Canada and close to 90% worldwide, reflect strong member loyalty and satisfaction. However, these figures could come under pressure if customers begin to perceive less value in the membership, if competitors become more aggressive with promotions, or if economic conditions make consumers more cautious about discretionary spending. A decline in renewals would not only hurt recurring revenue but could also signal weakening trust in the brand, making it harder to attract new members. Membership fee increases, while necessary over time, also carry some risk. Although Costco typically raises fees modestly and infrequently, roughly every five to six years, poor timing, such as during an economic downturn, could prompt some members to cancel or delay renewals. Ultimately, maintaining strong membership growth is essential because it underpins everything else in Costco’s business model: steady sales, operating efficiency, and pricing power. Without a growing and loyal membership base, the company’s low-cost, high-volume strategy would be much harder to sustain.

Reasons to invest

The expansion of new warehouses is a reason to invest in Costco. The company continues to grow its global footprint in a disciplined and profitable way, using new warehouse openings to drive membership growth, strengthen its brand presence, and support long-term sales expansion. In fiscal year 2025, Costco opened 27 new warehouses, including 3 relocations, bringing the total to 914 worldwide. Management plans to open another 35 in fiscal year 2026, with opportunities identified across both existing and new markets. This steady pace of expansion provides a clear path for continued growth in revenue and membership income. Each new warehouse represents a multi-decade growth engine. When Costco enters a new region, the initial openings tend to generate strong sign-ups and rapid membership growth, particularly in international markets where brand awareness is still developing. These new locations often see their sales increase year after year as members become more familiar with the Costco model and shop more frequently. In mature markets such as the United States, new openings are often part of an infill strategy, adding locations in areas with existing demand to reduce crowding, increase convenience, and allow members to shop more often. This approach not only grows total sales but also relieves pressure on high-traffic warehouses, improving the overall shopping experience. International expansion remains one of Costco’s most compelling growth opportunities. The company’s membership-based model, built around high-quality products at low prices, resonates strongly with middle-class consumers in emerging and developed markets alike. Management has emphasized that there is still significant runway for expansion, both in North America and abroad, with careful attention to site selection and return on investment. New warehouses in international markets typically deliver faster membership growth and higher long-term returns due to the combination of untapped demand and limited direct competition.

Improving the member experience is a reason to invest in Costco. The company’s long-term success depends on keeping its members loyal and engaged, and management continues to make targeted investments to enhance both convenience and value. Each improvement strengthens the relationship between Costco and its members, driving higher renewal rates, increased spending, and more upgrades to the higher-tier Executive Membership, which is particularly profitable. Recently, Costco introduced several new initiatives that have been well received. In June 2025, the company extended its warehouse hours, adding early morning access for Executive Members and an extra hour on Saturday evenings for all members. These changes immediately boosted traffic and sales, adding roughly 1% to weekly U.S. sales since implementation. The early access also reinforces the value of the Executive Membership tier, encouraging more members to upgrade. Costco has also deepened its partnership with Instacart, offering Executive Members a $10 monthly credit on orders above $150. This not only adds convenience for members who prefer home delivery but also extends Costco’s reach beyond the warehouse, blending its physical and digital channels more effectively. The result has been a clear increase in upgrades and greater engagement from existing members. Another area of focus is checkout and payment technology. Costco is rolling out enhanced scanning systems in all U.S. warehouses, allowing employees to pre-scan items while members are still in line. This makes the checkout process significantly faster and smoother, improving the overall shopping experience. Similarly, improvements to the Costco credit card program, including 5% cash rewards on gasoline purchases and expanded travel benefits, continue to add tangible value to membership. Digital investments are another key component of Costco’s strategy to enhance member experience. The company is upgrading its app and website to make them more user-friendly, faster, and personalized. Efforts such as passwordless sign-ins, improved search functionality, and waiting rooms for high-demand items all contribute to a smoother online experience while maintaining fairness and site stability during peak shopping periods. These ongoing initiatives reflect Costco’s commitment to continuously improving the value proposition for its members. By investing in convenience, technology, and meaningful member benefits, the company reinforces loyalty, drives spending, and supports membership growth, all critical elements of its long-term strategy.

Kirkland Signature is a reason to invest in Costco. The brand has become one of Costco’s most powerful competitive advantages and a major contributor to its long-term growth. Introduced in 1995, Kirkland Signature has evolved from a simple private label into a trusted symbol of quality and value. It now accounts for a significant share of total sales and continues to grow faster than the overall business. The strength of Kirkland Signature lies in its ability to offer products that match or exceed the quality of national brands at prices typically 15–20% lower. This value proposition reinforces Costco’s reputation for fairness and reliability, encouraging members to shop more frequently and deepen their loyalty to the brand. Every time a member chooses a Kirkland product over a national brand, Costco strengthens its relationship with that customer and increases its pricing flexibility, as Kirkland’s value is based on trust rather than brand advertising. Kirkland Signature also plays an important role in supporting Costco’s margins. Even though the company keeps profit margins on Kirkland products modest to preserve value for members, higher sales penetration boosts overall profitability. The brand helps offset inflationary pressures and tariff impacts by providing Costco with greater control over product sourcing, production, and pricing. Beyond cost savings, Kirkland Signature allows Costco to innovate and fill product gaps where national brands may not deliver the desired combination of price and quality. The company introduces new Kirkland products whenever it identifies opportunities to create better value for members, further expanding the brand’s reach across categories. These new offerings not only attract more members but also enhance Costco’s differentiation in an industry where most retailers sell the same branded products. Over time, Kirkland Signature has become much more than a private label, it is a strategic asset that deepens customer loyalty, improves profitability, and strengthens Costco’s competitive position. Its continued growth underscores Costco’s ability to deliver consistent value, adapt to market conditions, and expand its global appeal. As the brand continues to gain share across product categories and regions, it remains one of the clearest reasons to invest in Costco.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 18,21, which is from fiscal year 2025. I have selected a projected future EPS growth rate of 10% (Finbox expects EPS to grow by 10,6%). Additionally, I have chosen a projected future P/E ratio of 20, which is twice the growth rate. This decision is based on the fact that Costco has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $233,10. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Costco at a price of $116,75 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 13.335 and capital expenditures were 5.498. I attempted to review their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 3.849 in our calculations. The tax provision was 2.719. We have 443,5 outstanding shares. Hence, the calculation will be as follows: (13.335 – 3.849 + 2.719) / 443,5 x 10 = $275,20 in Ten Cap price.

The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Costco's Free Cash Flow Per Share at $17,67 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is $222,28.

Conclusion

Costco is an intriguing company with strong management. It has built a durable moat through cost efficiency, membership loyalty, scale, and a strong company culture. The company has consistently achieved a high ROIC, reaching its highest level in more than a decade in fiscal year 2025. Free cash flow also hit a new all-time high in the same year, which is especially encouraging given the increase in capital expenditures. Competition remains a risk because Costco operates in one of the most crowded retail environments, where it must defend its market share against warehouse clubs, large retailers, online giants like Amazon, and hard discounters. Its low-price, high-volume model limits pricing flexibility, making it vulnerable if competitors become more aggressive on promotions or technology. Macroeconomic factors also pose a risk since Costco’s business model is sensitive to inflation, interest rates, and shifts in consumer spending. Rising costs for goods, wages, or energy can pressure margins, while slower economic conditions in key regions such as the U.S. and Canada can weigh on sales and membership renewals. Membership growth is another crucial factor, as fees represent a small portion of revenue but a large portion of profits. Slower member growth, weaker renewal rates, or poorly timed fee increases could affect this reliable income stream and reduce Costco’s ability to maintain its low-price strategy. On the positive side, warehouse expansion supports long-term growth, with new locations driving membership sign-ups, higher sales, and greater brand visibility. The company’s continued focus on improving the member experience through extended hours, delivery benefits, faster checkout, and digital upgrades has strengthened loyalty and encouraged more members to upgrade to the Executive tier. Another key advantage is the Kirkland Signature brand, which has become central to Costco’s success by offering high-quality products at prices well below national brands, deepening customer trust and supporting profitability. Overall, I believe Costco is a great company with strong fundamentals and long-term potential, and I would consider buying shares at the intrinsic value of the Ten Cap price of $550.

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