Costco Wholesale will achieve a profit margin increase of 2.9426% in the next five years

Costco’s biggest strengths are its ultra-sticky memberships (~90% renewal), strong pricing power, and inflation-resilient “low-price leader” model. Membership fees (1.9% of revenue) drive most of its 2–3% profit margin and give it a unique buffer that lets it keep prices low. Kirkland is a powerhouse ($86B sales), and international expansion—especially in China—is accelerating growth. Financial health is solid with assets covering both short- and long-term liabilities.

The main risks are its very high valuation (40–50x earnings), reliance on membership revenue, and long-term threats from e-commerce. At current assumptions, the stock is fairly valued, meaning any slowdown in growth, margin pressure, or multiple compression could make it look expensive quickly. However, Costco’s historical consistency and global runway continue to support the bull case.

Catalists

1/ Membership Growth & Fee Hike Potential

• The successful membership fee hike in 2024 also boosted confidence
• Membership base remains sticky with high renewal rates (~90%+).
• Membership fee hikes and high renewal rates viewed as positives – a direct profit boost with loyal members willing to pay for value
• Membership income insulates its profits from inflation, which investors see as a unique strength.

2/ Inflation Resilience

• a “low-price leader” that benefits from inflationary periods by attracting cost-conscious shoppers
• An August 2025 analysis pointed out that rising food prices can enhance Costco’s appeal and that Costco’s annual membership fees provide a buffer against margin pressures – allowing it to keep prices low even when costs rise
• any on Substack and Seeking Alpha pointed to these sticky memberships and the “membership flywheel” as reasons Costco can keep compounding steadily

3/ Store Expansion Plans

• Continued expansion, especially internationally, is seen as a growth driver.
• The demand is high, just look at how crowded it is at both 2 Costcos in Sydney

4/ Private Label: Kirkland

• Kirkland Signature is viewed as a major strength
• In 2024, Kirkland’s annual sales were estimated around $86 billion – roughly one-third of Costco’s total revenue. This makes Kirkland larger than many standalone companies, and incredibly, it’s more profitable per unit (due to Costco’s low markup policy) while still cheaper for consumers

5/ International Performance

• Retail investors applaud Costco’s success in new countries like China and see significant global runway for growth
• In the past year, Costco saw strong results from its operations abroad – “strong international gains” helped fuel a ~5.7% jump in comparable sales in a recent quarter

6/ Solid Financial Health

Short Term Liabilities: COST's short term assets ($38.2B) exceed its short term liabilities ($37.6B).

Long Term Liabilities: COST's short term assets ($38.2B) exceed its long term liabilities ($10.8B).

7/ It pays dividend

• However, if it stops doing that, it would still be fine

Risks

Very high valuation multiples for a defensive stock

• Consistently trades at 40 - 50x and that has been climbing over time
• This exposes investors to risk that should the market start to prefer less defensive stocks, costco could start to see some multiple compression

Profit margins are highly dependent on membership revenue

• Total profit margin for Costco is about 2.9%. Reporting suggests that the revenue from memberships makes up about 1.9% of total revenue

Shift towards ecommerce will remain a persistent threat to costco

Valuation

Valuation is very stretched - it absolutely has to maintain profit margins and PE to justify the current valuation.

In the future PE valuation model, assuming current revenue growth, profit margin and PE values hold true, the stock is basically around fair value.

This means that if any of the inputs miss the mark, the stock will veer into overvalued territory quite quickly.

Saying that, the performance over time has been very consistent, with continual revenue growth and margins remaining in that 2-3% range. International expansion does seem to be working, however one would imagine a slowdown in the US could threaten continued investment overseas without a compressions of profit margins.