Costco’s Success Story

In stark contrast, Costco Wholesale is excelling. Last quarter, Costco reported a robust revenue increase of 7.5%, and diluted earnings per share soared by 12.8%. Both results surpassed analyst expectations. Notably, Costco’s comparable-store sales grew by an impressive 7.1%, with margin expansion occurring even in this tough economic climate.

What sets Costco apart from other retailers? It isn’t merely because of being a discount retailer; many other low-cost competitors like Dollar General are not experiencing similar success.

Costco’s unique business model distinguishes it from both high-end and low-end rivals. This model fosters customer loyalty and promotes substantial savings.

Image source: Getty Images.

The Membership Advantage

Central to Costco’s success is its membership-based model. As a “club,” Costco requires an annual membership fee for access to its stores. Although this fee increased on September 1 to $65 for a basic Gold Star membership, it remains an attractive price for access to a wide range of deeply discounted products.

Financially, Costco’s membership revenue represents over half of its operating income, presuming that all membership fees are profit. In the fiscal first quarter ended November 24, membership fees comprised 53% of Costco’s total operating income.

This steady source of revenue enables Costco to operate with very slim product margins. Excluding membership revenue from the equation, Costco’s product-only operating margins were only 1.7%, a figure quite difficult for competitors to match.

The thin margins reflect not only Costco’s low prices but also the company’s investments in security and customer satisfaction. With industry-leading wages compared to other discount retailers, Costco has been able to reduce theft and enhance customer experience, even while raising wages in July. As a result, overall margins rose alongside membership growth.

Costco’s reputation for quality service attracts a diverse customer base, including wealthier consumers who appreciate value. This appeal has drawn premium brands, such as Peloton Interactive, which recently joined Costco’s vendor roster.

Costco Hits the $1,000 Mark

Some may be surprised by Costco’s high valuation, trading at 58 times earnings and recently reaching a share price of $1,000. However, the company’s ability to thrive in tough times has become evident as it captures price-sensitive consumers while gaining market share from competitors. Notably, as dining out becomes more expensive, Costco has reported a rise in demand for premium meats and fresh produce as consumers choose to eat at home.

This example highlights Costco’s overall benefit from pervasive inflation, bolstered by a membership model that keeps customers returning for great deals.

Is Costco Wholesale a Wise Investment Now?

Before deciding to purchase Costco Wholesale stock, consider the following:

The Motley Fool Stock Advisor team has identified the 10 best stocks right now for investors… and Costco Wholesale was not among them. These chosen stocks could yield significant returns in the years to come.

Reflect on Nvidia, which made this list on April 15, 2005… if you had invested $1,000 when recommended, it would now amount to $825,513!

Stock Advisor provides a straightforward investment guide, complete with portfolio building tips, regular analyst updates, and two new stock picks monthly. This service has outperformed the S&P 500 more than four times since 2002*.

Discover the 10 stocks »

*Stock Advisor returns as of December 16, 2024

Billy Duberstein and/or his clients hold positions in Costco Wholesale and Starbucks. The Motley Fool has interests in Costco Wholesale, Peloton Interactive, Starbucks, and Target and recommends them. The Motley Fool adheres to a disclosure policy.

The views expressed here represent the author’s opinions and do not necessarily reflect those of Nasdaq, Inc.