The late Charlie Munger once stated, "I love everything about Costco. I'm a complete addict, and I will never sell a share." I understand why he felt that way, as Costco has a great business model and appears to be growing steadily. The question is, at what price should you purchase Costco stock? This is what I will investigate in this post.
This is not a financial advice. I am not a financial advisor and I only do these posts 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 start by mentioning that at the time of writing this analysis, I do not own any shares of Costco. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in Costco's competitors either. Thus, I have no personal stake in Costco. 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 $100.
The Business
Costco Wholesale Corporation, headquartered in Washington, United States, is one of the largest global retailers. The company operates a chain of membership-only warehouse clubs and e-commerce websites, focusing on delivering value to its members by offering low prices on a curated selection of branded and private-label products. Costco’s business model centers on generating high sales volumes and rapid inventory turnover, driven by competitive pricing and operational efficiency. As of the end of fiscal year 2024, Costco operated 890 warehouses worldwide, with a significant presence in the United States (614 warehouses), along with notable footprints in Canada (108), Mexico (40), Japan (35), and other countries, including emerging markets like China (7). Membership is at the heart of Costco’s model, with customers selecting from three tiers: Executive ($120/year), Business ($60/year), or Gold Star ($60/year). The company boasts a global membership base of 136 million, with renewal rates exceeding 92% in the U.S. and Canada and over 90% internationally, demonstrating strong customer loyalty. Costco offers a diverse product range across categories such as food and sundries, fresh foods, and non-food items like electronics, apparel, and home goods. Many locations also provide additional services, including gasoline, pharmacies, optical departments, food courts, and tire installation. Its private-label brand, Kirkland Signature, is renowned for quality and value, further driving customer retention. Costco’s moat stems from its membership model, operational efficiency, strong brand identity, employee-centric culture, global expansion, and commitment to long-term value. The subscription-based model generates a stable revenue stream and ensures high customer retention, making the company resilient to economic fluctuations. Its warehouses emphasize simplicity and cost-saving measures, such as limited product selection and pallet-based displays, which reduce handling time and supply chain costs, enabling lower prices than competitors. Over the years, Costco has earned a reputation for consistent value, reflected in its growing membership base and the success of Kirkland Signature. Its focus on promoting from within and investing in employee development fosters a loyal, motivated workforce, contributing to operational excellence and exceptional customer service.
Management
Ron Vachris is the CEO of Costco, having assumed the role on January 1, 2024. Under his leadership, Costco remains committed to delivering high-quality goods at the lowest possible prices to its members, continuing the company's focus on value and customer satisfaction. Ron Vachris’s journey with Costco spans over four decades, starting at age 17 as a forklift driver. Throughout his career, he has held nearly every major role within the company, accumulating a deep understanding of its operations and merchandising practices. His career path reflects his exceptional insight into Costco’s business model, as he progressed through key leadership roles such as Senior Vice President of Real Estate Development, General Manager of the Northwest Region, and Executive Vice President of Merchandising. Before becoming CEO, Ron Vachris served as President and Chief Operating Officer from February 2022. As a seasoned leader with extensive operational and merchandising experience, Ron Vachris is well-positioned to guide Costco’s continued growth. He also serves on Costco’s Board of Directors. The company’s history of having only three CEOs in its four decades highlights the value of steady leadership, and Ron Vachris appears poised to uphold that legacy. His tenure is characterized by a steadfast commitment to Costco’s core principles while embracing innovation to meet evolving customer needs. Ron Vachris is focused on global expansion, enhancing Costco’s warehouse footprint, and advancing its digital capabilities. Despite these modernizations, he remains deeply connected to the values that have defined Costco’s success, emphasizing humility and consistency - principles that guided the company when it had just 200 warehouses. He views the membership card as Costco’s most important product, reinforcing its value proposition for members who pay $60 to $120 annually for access to warehouses and exclusive deals. As a leader, Ron Vachris brings a philosophy rooted in his early experiences with the company, maintaining a practical, member-focused approach. While his tenure as CEO is still in its early stages, his vast experience and dedication to Costco’s mission inspire confidence in his ability to lead the company into the future.
The Numbers
The first metric to examine is the return on invested capital (ROIC). Ideally, we want to see a 10-year history of ROIC consistently exceeding 10%. Costco has achieved this benchmark every year over the past decade, which is an encouraging sign of its strong financial performance. Even more impressive is that Costco’s ROIC has exceeded 20% in the past four years, a trend that is unprecedented for the company. The fiscal year 2024 marked a milestone as Costco achieved its highest ROIC in the past decade. Several factors contributed to this achievement, including higher profit margins, increased net sales, higher membership fees, and the addition of new warehouses. These elements reflect Costco’s ability to efficiently reinvest capital into its operations and growth. Costco serves as a near-textbook example of an ideal ROIC profile. Over the past 10 years, its ROIC has consistently remained above 10% and demonstrated strong growth, rising from 15,4% in 2015 to 25,0% in 2024. While the growth trajectory has not been perfectly linear, the overall trend is impressive. This steady improvement in ROIC underscores Costco’s efficient use of capital and its resilience in delivering value to both members and shareholders.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. Overall, the numbers look strong. While there were years when equity decreased, the growth from $13.482 in 2015 to $32.663 in 2024 has been impressive. This represents a compounded annual growth rate (CAGR) of over 9%, which is remarkable.
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. It is unsurprising that Costco has consistently generated positive free cash flow every year over the past decade. In fiscal year 2024, free cash flow decreased slightly due to higher capital expenditures related to opening new warehouses and making store improvements. Had capital expenditures not increased, Costco would have achieved higher free cash flow in 2024 than in 2023. Therefore, this decrease is not a concern. Costco’s levered free cash flow margin remains low despite the company’s high profitability. This is due to its business model, where the majority of profits come from membership fees rather than the sale of goods. In fiscal year 2024, the levered free cash flow margin declined slightly, reflecting the impact of increased capital expenditures. Additionally, the free cash flow margin reached its lowest point in the past decade, which suggests that Costco’s shares may currently be trading at a premium. This is an aspect that will be revisited later in the analysis.
Debt
Another critical factor to consider is the level of debt and its manageability. A good measure is whether the total long-term debt can be repaid within a three-year period, calculated by dividing total long-term debt by earnings. For Costco, this calculation reveals a debt-to-earnings ratio of 0,79 years, well within the three-year threshold. As a result, debt is not a concern when evaluating Costco as an investment. Notably, Costco has not had a debt-to-earnings ratio exceeding three years since 1996. This track record suggests that debt is unlikely to pose a significant risk to Costco in the future.
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Risks
Competition poses a significant risk to Costco due to the highly dynamic and crowded retail landscape in which it operates. The company faces intense rivalry from various players, including other warehouse clubs such as Sam’s Club and BJ’s Wholesale Club, general merchandise giants like Walmart, Target, and Amazon, as well as specialized competitors such as supermarkets, department stores, and hard discounters. The rise of online and mobile retail channels further intensifies competition, as consumers can easily compare prices and shop across multiple platforms. These dynamics threaten Costco’s market share, especially if it cannot adapt to changing consumer preferences and technological advancements. Retail competition spans several fronts, including pricing, merchandise quality and selection, convenience, location, and customer service. Costco also faces challenges in attracting and retaining employees, securing prime locations, and sourcing merchandise. Competitors with deeper financial resources, stronger technological capabilities, and greater market penetration - such as Amazon - pose a formidable threat. Amazon’s technological edge, especially in artificial intelligence and e-commerce, along with its aggressive promotional strategies, makes it a particularly challenging competitor. Costco’s competitive strategy is heavily reliant on maintaining low prices, which depends on high sales volumes and rapid inventory turnover. However, as competitors in categories like appliances and consumer electronics increase promotions and discounts to drive unit sales, Costco faces growing pressure to match these efforts.
Macroeconomic factors pose a significant risk to Costco, as they can negatively impact both consumer demand and the company's operational costs. The retail industry is highly sensitive to economic conditions, and as a global business, Costco is exposed to challenges arising from both domestic and international economic fluctuations. One major concern is inflation. Rising costs for merchandise, labor, energy, and other operational inputs can compress Costco’s profit margins, especially if the company is unable or unwilling to pass these costs on to members. As part of its core value proposition, Costco prioritizes low prices, and raising prices to offset inflation may deter price-sensitive customers, potentially affecting sales volumes and membership renewals. Volatility in commodity prices, such as gasoline and consumable goods, adds to the complexity. These fluctuations, driven by global supply and demand dynamics, market speculation, or government policies, can rapidly increase Costco’s operating expenses. Given its high-volume, low-margin business model, even modest cost increases can disproportionately impact profitability. Broader economic conditions such as high unemployment, weakened consumer confidence, and elevated consumer debt levels can also dampen demand for Costco’s products, particularly in discretionary or non-essential categories. For example, during economic downturns or periods of financial instability, consumers may focus on essential goods, leading to reduced sales in higher-margin categories like electronics and apparel. Additionally, economic pressures may alter consumer behavior in ways that affect Costco’s subscription-based revenue. Customers may opt for lower-tier memberships, delay renewals, or choose not to renew at all during periods of financial strain. These shifts could impact Costco’s ability to generate stable and recurring revenue from its membership model.
Failure to maintain membership growth represents a significant risk for Costco, as its business model relies heavily on membership fees as a key driver of profitability. While membership fees contribute less than 2% of the company’s total revenue, they account for a disproportionately large share of its profits due to the low-margin nature of its retail operations. Consequently, any decline in membership growth, renewal rates, or customer loyalty could directly harm Costco’s financial performance. Membership loyalty and growth are critical to Costco’s success. Expanding the membership base and increasing the penetration of higher-tier Executive memberships are pivotal to driving profitability. Executive members, who pay a higher annual fee, also tend to spend more at Costco, making them a crucial component of the company’s growth strategy. A failure to attract new members or retain existing ones could result in stagnating or declining sales, reduced membership fee revenue, and weakened overall financial results. Renewal rates are a key metric of membership loyalty. Costco boasts exceptionally high renewal rates - over 92% in the U.S. and Canada and above 90% internationally - which underscore strong customer retention. However, if renewal rates decline due to factors such as customer dissatisfaction, heightened competition, or a perceived reduction in value, Costco risks losing a stable and predictable revenue stream. A decline in renewal rates could also erode trust in the brand, damaging Costco’s reputation and making it more challenging to attract new members.
Reasons to invest
The expansion of new warehouses is a compelling factor that highlights Costco’s commitment to sustainable growth and its ability to leverage domestic and international market opportunities. In fiscal 2024, the company successfully opened 30 new warehouses, achieving its annual target and bolstering its presence in key markets. For fiscal 2025, Costco plans to open 29 new warehouses, with a significant portion located outside the U.S., reflecting a well-balanced global expansion strategy. This approach underscores Costco’s ability to diversify its revenue streams and cater to growing demand for its value-focused model. By strategically expanding its warehouse footprint, Costco reduces its reliance on North American markets and positions itself to capitalize on long-term global retail trends. Domestically, the company targets infill opportunities in high-demand areas, driving incremental growth and enhancing convenience for its members. Internationally, Costco continues to penetrate untapped markets where its membership-based model appeals to expanding middle-class populations. Costco’s disciplined strategy ensures that new warehouses are carefully located in areas with strong potential for membership growth and high traffic. This operational precision allows each new location to meaningfully contribute to expanding the membership base, driving sales growth, and enhancing overall profitability. The ongoing warehouse expansion supports Costco’s top-line growth, reinforces its value proposition, and strengthens its competitive position on a global scale.
E-commerce is an increasingly compelling factor in Costco’s investment case, as the company continues to achieve robust growth and implement strategic innovations in this channel. Over the past year, Costco's e-commerce business has demonstrated impressive momentum, with comparable sales rising 18.9% year-over-year. A key driver of this success is Costco Logistics, which has delivered exceptional results by handling over 4.5 million deliveries in fiscal 2024 - a 29% year-over-year increase. Growth was particularly strong in the big and bulky segment, which includes appliances and furniture. Costco’s commitment to enhancing its logistics capabilities - improving item assortment, delivery times, and scheduling functionality - has significantly improved the member experience and positioned the company for continued success. However, Costco’s e-commerce expansion extends far beyond big and bulky items. Categories like health and beauty aids, tires, toys, gift cards, housewares, home furnishings, optical, and pharmacy all experienced double-digit growth year-over-year, showcasing broad-based strength across the platform. The company has also introduced member-focused innovations such as “buy online, pickup in warehouse” for high-value items like TVs. This hybrid approach combines the convenience of online shopping with cost-efficiency, as it offsets high shipping costs with freight savings, reinforcing Costco’s commitment to delivering value. Costco’s e-commerce growth is supported by improvements in traffic, conversion rates, and average order value, all contributing to strong comparable sales growth. Operational enhancements, including optimized inventory management, more efficient fulfillment processes, and better sell-through rates, have also driven improved margins and operational leverage. Over the past decade, Costco’s e-commerce business has achieved a compounded annual growth rate exceeding 20%, establishing itself as a significant growth driver. While e-commerce margins remain lower than in-warehouse shopping due to higher fulfillment costs, Costco has made notable progress in improving efficiency and leveraging economies of scale. As e-commerce volumes continue to grow, the company is successfully reducing per-unit fulfillment costs, enhancing profitability in this channel over time.
Kirkland Signature is a strong reason to consider investing in Costco, as it highlights the company’s ability to deliver exceptional value while driving growth, loyalty, and profitability. This private-label brand, which continues to outpace the overall business in growth, is central to Costco’s value proposition and a significant contributor to member loyalty. A major strength of Kirkland Signature is its ability to offer high-quality products at prices substantially lower than comparable national brands. This consistent value attracts members and builds trust, as shoppers associate Kirkland Signature with affordability and quality. With penetration now in the high 20% range across Costco’s product mix, Kirkland Signature has become a cornerstone of the company’s success, driving unit volumes and supporting its low-margin, high-volume business model. Costco’s disciplined approach to Kirkland Signature’s margins further underscores its value. By setting strict limits on the margins it expects to earn on Kirkland products, the company maintains the brand’s affordability while creating incremental margin benefits through increased penetration. Costco leverages its scale, sourcing efficiencies, and innovative production methods to ensure Kirkland Signature products remain cost-competitive, which bolsters profitability over time. The introduction of new Kirkland Signature products is another growth catalyst. Each launch reflects Costco’s focus on innovation and expanding the brand’s appeal. As the product portfolio continues to grow, Kirkland Signature strengthens Costco’s competitive advantage by offering exclusive items that members cannot find elsewhere.
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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.
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 16,56, which is from fiscal year 2024. I have selected a projected future EPS growth rate of 10% (Finbox expects EPS to grow by 9,7%). 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 $212,34. 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 $106,17 (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 11.339 and capital expenditures were 4.710. 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 3.297 in our calculations. The tax provision was 2.373. We have 443,126 outstanding shares. Hence, the calculation will be as follows: (11.339 – 3.297 + 2.373) / 443,126 x 10 = $235,03 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 $14,95 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is $188,06.
Conclusion
Costco is an intriguing company with strong management. The company has a moat through its membership model, operational efficiency, strong brand identity, employee-centric culture, global expansion, and long-term value focus. It has consistently achieved a high ROIC, and free cash flow only decreased in fiscal year 2024 due to higher capital expenditures. Competition is a significant risk for Costco because it operates in a crowded and dynamic retail landscape, facing pressure from warehouse clubs, general merchandise giants, and online retailers like Amazon, which leverage technological advantages and aggressive promotional strategies. Costco's reliance on maintaining low prices and high sales volumes makes it vulnerable to price wars and shifts in consumer behavior. Macroeconomic factors also pose a risk for Costco, as inflation, commodity price volatility, and shifts in consumer behavior can raise operational costs and weaken demand, particularly for discretionary items. Given its low-margin, high-volume model and reliance on membership revenue, even small economic disruptions can disproportionately impact Costco's profitability and customer retention. Failure to maintain membership growth is another significant risk for Costco because its profitability relies heavily on membership fees, which account for a large portion of its earnings despite being a small share of revenue. The expansion of new warehouses is a reason to invest in Costco, as it drives top-line growth, strengthens its global presence, and caters to growing demand for its value-driven model. E-commerce is also a compelling reason to invest in Costco, with strong sales growth, strategic innovations, and increasing operational efficiency driving momentum in this channel. With a compounded annual growth rate exceeding 20% over the past decade, Costco’s focus on enhancing logistics, expanding product categories, and leveraging scale positions its e-commerce business as a significant driver of long-term growth and profitability. Kirkland Signature is another key reason to invest in Costco, as its high-quality, value-priced products drive growth, member loyalty, and profitability. With expanding penetration and exclusive offerings, the brand reinforces Costco’s competitive advantage and low-margin, high-volume model. I really like Costco and its business model, and I will buy shares at the intrinsic value of the Ten Cap price of $470.
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