3 Facts About Costco You Must Know Before Buying the Stock

Costco Wholesale Corporation (NASDAQ: COST) has been a favorite among investors and consumers alike, with its stock price soaring over the past decade. Before you consider adding COST to your portfolio, here are three key facts you should know.

1. Memberships matter

Costco's business model revolves around its membership program, which generates a significant portion of its revenue. In fiscal 2024, the company raked in $4.8 billion in membership fee income, up 5.4% year over year. This predictable and high-margin revenue stream allows Costco to maintain low prices and invest in its business.

The membership program also fosters customer loyalty, with 76.2 million households worldwide. Despite price increases in 2017 and 2011, the membership count continues to grow, indicating the value customers find in the program.

2. Scale advantages

Costco's massive scale gives it a durable competitive advantage. With $249.6 billion in net sales in fiscal 2024, it's the third-largest retailer globally, behind only Walmart and Amazon. This scale allows Costco to negotiate favorable pricing with suppliers, offering shoppers low prices and driving repeat business.

Costco carries an average of 4,000 different stock-keeping units (SKUs) in its warehouses, compared to the 30,000 or so SKUs found in traditional supermarkets. This focus on a limited number of goods enables Costco to obtain favorable pricing from vendors and maintain low-profit margins, typically around 11%.



3. Valuation considerations

While Costco's stock has performed exceptionally well, its valuation has become stretched. As of recent reports, shares trade at a P/E ratio of 60, the highest in the company's history. Although Costco is a strong business with a robust growth outlook, this valuation may not reflect the true potential of the stock.

Wall Street analysts expect Costco's earnings per share to grow at a compound annual rate of 11% over the next three years. However, the current P/E ratio may be too high for investors seeking immediate gains.

In conclusion, Costco's membership model, scale advantages, and strong financial performance make it an attractive investment. However, investors should be aware of the company's stretched valuation and consider the potential risks before purchasing the stock. As always, it's essential to conduct thorough research and consult with a financial advisor before making any investment decisions.