Costco (COST)

Membership-only discount retailer Costco (NASDAQ:COST) met Wall Street’s revenue expectations in Q3 CY2025, with sales up 8.1% year on year to $86.16 billion. Its GAAP profit of $5.87 per share was 1.1% above analysts’ consensus estimates.

Company Overview

Designed to be a one-stop shop for the suburban consumer, Costco (NASDAQ:COST) is a membership-only retail chain that sells groceries, apparel, toys, and household items, often in bulk quantities.

Big-box retailers operate large stores that sell groceries and general merchandise at highly competitive prices. Because of their scale and resulting purchasing power, these big-box retailers–with annual sales in the tens to hundreds of billions of dollars–are able to get attractive volume discounts and sell at often the lowest prices. While e-commerce is a threat, these retailers have been able to weather the storm by either providing a unique in-store shopping experience or by reinvesting their hefty profits into omnichannel investments.

Competitors that offer groceries and/or other general merchandise in large-format stores include BJ’s Wholesale Club, Walmart (NYSE:WMT), and Kroger (NYSE:KR).

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $275.2 billion in revenue over the past 12 months, Costco is a behemoth in the consumer retail sector and benefits from economies of scale, giving it an edge in distribution. This also enables it to gain more leverage on its fixed costs than smaller competitors and the flexibility to offer lower prices.

As you can see below, Costco’s sales grew at a decent 10.3% compounded annual growth rate over the last six years (we compare to 2019 to normalize for COVID-19 impacts) as it opened new stores and increased sales at existing, established locations.

This quarter, Costco grew its revenue by 8.1% year on year, and its $86.16 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 7.1% over the next 12 months, a deceleration versus the last six years. We still think its growth trajectory is attractive given its scale and suggests the market sees success for its products.

Number of Stores

A retailer’s store count influences how much it can sell and how quickly revenue can grow.

Costco operated 914 locations in the latest quarter. It has opened new stores quickly over the last two years, averaging 2.9% annual growth, faster than the broader consumer retail sector.

When a retailer opens new stores, it usually means it’s investing for growth because demand is greater than supply, especially in areas where consumers may not have a store within reasonable driving distance.

Same-Store Sales

The change in a company's store base only tells one side of the story. The other is the performance of its existing locations and e-commerce sales, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales provides a deeper understanding of this issue because it measures organic growth at brick-and-mortar shops for at least a year.

Costco has been one of the most successful retailers over the last two years thanks to skyrocketing demand within its existing locations. On average, the company has posted exceptional year-on-year same-store sales growth of 5.7%. This performance suggests its rollout of new stores is beneficial for shareholders. We like this backdrop because it gives Costco multiple ways to win: revenue growth can come from new stores, e-commerce, or increased foot traffic and higher sales per customer at existing locations.

In the latest quarter, Costco’s same-store sales rose 6.4% year on year. This performance was more or less in line with its historical levels.

Costco has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 12.7% gross margin over the last two years.

Non-discretionary retailers, however, must be viewed through a different lens because they compete on the lowest price, sell products easily found elsewhere, and have high transportation costs to move goods. These dynamics lead to structurally lower gross margins, so the best metrics to assess them are free cash flow margin, operating leverage, and profit volatility, which account for their scale advantages and non-cyclical demand.

Costco’s gross profit margin came in at 12.9% this quarter, in line with the same quarter last year and easily exceeding analysts’ estimates. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting it strives to keep prices low for customers and has stable input costs (such as labor and freight expenses to transport goods).

Costco’s operating margin might fluctuated slightly over the last 12 months but has remained more or less the same, averaging 3.7% over the last two years. This profitability was lousy for a consumer retail business and caused by its suboptimal cost structureand low gross margin.

Analyzing the trend in its profitability, Costco’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Costco generated an operating margin profit margin of 3.9%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Costco has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 2.7% over the last two years, slightly better than the broader consumer retail sector.

Costco’s free cash flow clocked in at $1.90 billion in Q3, equivalent to a 2.2% margin. This cash profitability was in line with the comparable period last year and its two-year average.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Costco’s five-year average ROIC was 34.9%, placing it among the best consumer retail companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

Big corporations like Costco are attractive to many investors in times of instability thanks to their fortress balance sheets that buffer pockets of soft demand.

Costco is a profitable, well-capitalized company with $15.28 billion of cash and $8.17 billion of debt on its balance sheet. This $7.11 billion net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

Despite in-line revenue, we were impressed that Costco beat analysts’ gross margin and EPS expectations this quarter. Overall, we think this was still a solid quarter with some key areas of upside. The stock remained flat at $937.15 immediately after reporting.

Updated: December 4, 2025 at 9:30 PM EST

Before deciding whether to buy Costco or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Costco possesses a number of positive attributes. Although its revenue growth was a little slower over the last three years, its growth over the next 12 months is expected to be higher. And while Costco’s gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses, its marvelous same-store sales growth is on another level. On top of that, its stellar ROIC suggests it has been a well-run company historically.

Costco’s P/E ratio based on the next 12 months is 46.1x. This valuation tells us that a lot of optimism is priced in. Costco is a good one to add to your watchlist - there are companies featuring superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $1,057 on the company (compared to the current share price of $895.58).