Costco's Membership Forte: Why $1,175 Target is Within Reach

Costco Wholesale Corp. (NASDAQ:COST) continues to defy market skepticism, with BMO Capital Markets reaffirming its Outperform rating and a $1,175 price target as of June 2025. This bullish stance hinges on the retailer's relentless focus on its Executive membership model—a segment that fuels 73% of sales despite representing just 47% of members—and a series of strategic initiatives aimed at locking in loyalty. Amid mixed analyst sentiment and valuation concerns, Costco's financial resilience and cash flow dominance argue for its staying power. Here's why investors should take note.

The Membership Moat: Why 47% of Members Drive 73% of Sales

Costco's success is rooted in its Executive Membership program, which charges $80 annually for perks like exclusive discounts and free shipping. The math is clear: these members spend far more than Standard Members ($60/year), contributing disproportionately to revenue. Analysts at BMO argue that recent perks—such as a $10 monthly credit for same-day Instacart orders and extended shopping hours for Executives—are direct investments in this high-margin segment. These moves aren't just retention tools; they're designed to deepen the switching costs for members who rely on Costco's bulk pricing and convenience.

The strategy is working. May 2025 sales rose 6.8% to $20.97 billion, with e-commerce sales surging 11.6%—a critical win for a business historically reliant on foot traffic. Meanwhile, the first 39 weeks of the fiscal year saw net sales climb 8.0% to $201.02 billion, underscoring the model's scalability.

International Momentum: A Growth Engine Ignored by Bulls and Bears

While U.S. non-food sales face headwinds (a key concern for Mizuho's neutral stance), international markets are firing on all cylinders. BMO notes that international sales now account for 43% of total revenue, up from 40% in 2020. Initiatives like the standalone gas station pilot in California—a test of how to monetize underused warehouse space—could provide a template for global expansion. In Asia and Europe, where membership penetration is lower, Costco's $149 billion in cash and equivalents (as of Q1 2025) give it the capital to open new warehouses in underserved regions.

Valuation Concerns? BMO's Case for Outperforming

Critics argue Costco's P/E ratio of 31.5 (vs. the S&P 500's 22.3) reflects frothy pricing, but BMO counters that the stock's 22-year dividend streak and $441 billion market cap reflect its cash flow reliability. The firm also cites a quick ratio of 0.8—below 1, a red flag for liquidity—yet downplays this by emphasizing that Costco's inventory turnover is among the fastest in retail.

The $1,175 price target isn't arbitrary. It factors in:
1. Membership growth: BMO expects Executive membership penetration to hit 50% by 2026.
2. Digital adoption: E-commerce sales, now 10% of total revenue, could hit 15% within three years.
3. Global store expansion: Plans to add 30 warehouses globally by 2027, including in Mexico and Japan.

A Contrarian Play for Patient Investors

While the stock closed at $985.14 on June 19—below BMO's target—the consensus $1,024.03 price target (from 30 analysts) suggests upside remains. Even skeptics like Mizuho acknowledge that international sales growth and member retention could offset U.S. slowdowns.

For investors, the key is to look past short-term noise. Costco's low-cost structure (SG&A expenses at just 7% of revenue), sticky membership base, and debt-free balance sheet make it a rare blend of value and growth. The $1,175 target is achievable if the company meets just 80% of its membership and e-commerce goals.

Final Take: Buy the Dip, Hold for the Moat

Costco's valuation isn't for the faint-hearted, but its fortress-like cash flows and unrivaled membership leverage justify BMO's bullish call. The stock's recent dip below $1,000 offers a buy opportunity for long-term investors. While risks like inflation or a recession loom, Costco's ability to raise prices (its membership fee hasn't increased since 2017) and attract discretionary spending in lean times gives it an edge.

Bottom line: Costco's membership model is its moat. Investors who focus on this core strength—and ignore the noise about valuation—could be rewarded handsomely. The $1,175 target isn't a stretch; it's a logical outcome of a retailer doubling down on what works.