Costco (COST)

Membership-only discount retailer Costco (NASDAQ:COST) met Wall Street’s revenue expectations in Q2 CY2025, with sales up 8% year on year to $63.21 billion. Its GAAP profit of $4.28 per share was 1.2% 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 sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $268.8 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 grew its sales 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% year on year, and its $63.21 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 6.8% 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 often determines how much revenue it can generate.

Costco sported 905 locations in the latest quarter. Over the last two years, it has opened new stores quickly, averaging 3% annual growth. This was 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%. 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 5.7% 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 12.6% 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.

This quarter, Costco’s gross profit margin was 13%, 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).

Operating margin is a key profitability metric because it accounts for all expenses necessary to run a store, including wages, inventory, rent, advertising, and other administrative costs.

Costco was profitable over the last two years but held back by its large cost base. Its average operating margin of 3.7% was weak for a consumer retail business. This result isn’t too surprising given its low gross margin as a starting point.

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.

In Q2, Costco generated an operating margin profit margin of 4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Costco’s full-year EPS grew at a decent 14.5% compounded annual growth rate over the last five years, better than the broader consumer retail sector.

In Q2, Costco reported EPS at $4.28, up from $3.78 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects Costco’s full-year EPS of $17.49 to grow 11%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

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 2.8% over the last two years, slightly better than the broader consumer retail sector.

Taking a step back, we can see that Costco’s margin was unchanged over the last year, showing it recently had a stable free cash flow profile.

Costco’s free cash flow clocked in at $2.33 billion in Q2, equivalent to a 3.7% 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 34.2%, 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 $14.85 billion of cash and $8.18 billion of debt on its balance sheet. This $6.67 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.

We were impressed by how significantly Costco blew past analysts’ gross margin expectations this quarter. We were also happy its EPS and EBITDA outperformed Wall Street’s estimates. Overall, this print had some key positives. The stock remained flat at $1,015 immediately after reporting.

Updated: June 14, 2025 at 10:36 PM EDT

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

Costco is a rock-solid business worth owning. For starters, its revenue growth was decent over the last six years. And while its 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, Costco’s stellar ROIC suggests it has been a well-run company historically.

Costco’s P/E ratio based on the next 12 months is 51x. There’s no doubt it’s a bit of a market darling given the lofty multiple, but we don’t mind owning a high-quality business, even if it’s expensive. We’re in the camp that investments like this should be held for at least three to five years to negate the short-term price volatility that can come with high valuations.

Wall Street analysts have a consensus one-year price target of $1,057 on the company (compared to the current share price of $991.50).