VALUATION HIGHLIGHTS

1. Core Merchandise US constitutes 50% of the Trefis price estimate for Costco's stock.
2. Core Merchandise International constitutes 18% of the Trefis price estimate for Costco's stock.
3. Ancillary Business constitute 18% of the Trefis price estimate for Costco's stock.

WHAT HAS CHANGED?

1. Costco Saw Mixed Q2 Results

For its fiscal second quarter, the retailer reported $4.02 (up 3% year-over-year) in earnings per share on $63.72 billion up 9% y-o-y) in revenue. Analysts had anticipated $4.11 and $62.13 billion, respectively. Comparable sales for the company increased 6.8% y-o-y. In the U.S., comparable sales rose 8.3% as well. Traffic rose 5.7% globally and 5.6% in the U.S. The company’s top sales categories included gold and jewelry, furniture, hardware and toys, all of which grew double digits year-over-year.

Note: Costco FY'24 ended on September 1, 2024. Q2 FY'25 refers to the quarter that ended on February 16, 2025

2. Growth in Membership Households

In terms of renewal rates, at Q2 end, its U.S. and Canada renewal rate was 93.0%, up 0.2% from Q1 end. The worldwide rate came in at 90.5%, also up 0.1%. The company's renewal rates are seeing some impact from higher growth in digital sign-ups, which renew at a slightly lower rate than the base as a whole. Q2 ended with 36.9 million paid Executive Memberships, up 9.1% y-o-y. Executive Members represent 47.1% of paid members and 73.8% of worldwide sales.

3. Raised Annual Membership Fee

Costco hiked its basic membership fee for the first time in since 2017, increasing the annual charge to $65 from $60. The 8.3% cost increase took effect on September 1, 2024. The cost of a premium membership increased to $130 from $120 and the maximum annual 2% reward for its executive membership rose to $1,250 from $1,000. Costco has a track record of increasing membership costs every five years or so, but company executives said they were holding back as shoppers grappled with high inflation.

Q2 marked the company’s second quarter since its membership fee hike went into effect in September. Costco’s Q2 membership fee revenue came in at $1.19 billion, up 7% y-o-y. However, the membership fee hike hasn’t had much of an effect yet because of deferred accounting. It represented less than 1% of fee growth in Q1 2025 and only 3% of fee growth in the second quarter. The majority of the benefit from the membership fee increase is expected to come over the next four fiscal quarters, with the largest impact in Q4 2025 and Q1 2026.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Costco's value that present opportunities for upside or downside to the current Trefis price estimate for Costco:

• Revenue per Square Foot for Costco U.S. : Revenue per Square Foot for Costco US has increased from about $1392 in 2021 to $1586 in FY 2024. It is an important metric to measure retail sales success and is a factor that drives operating margins. Trefis expects it to increase and reach $2,321 by the end of the forecast period. Increasing new membership signups and higher penetration of executive membership are expected to drive Revenue per Square Foot for Costco U.S. If Revenue per Square Foot for Costco U.S. increases to $2,570 driven by growing membership, there could be about a 5% upside to our price estimate. On the other hand, if the growth is limited to $2085, there could be about a 5% downside to our price estimate for Costco.


• Number of Costco U.S. Warehouse Clubs: Costco has been steadily expanding in the U.S. by opening more stores. The figure has increased from about 564 in FY 2021 to 614 in FY 2024. Trefis expects the store count to continue to rise and reach 742 in the long term. In case, the number of Costco U.S. Warehouse Clubs reaches 830 by the end of the forecast period, there could be a 5% upside to the Trefis estimate. On the other hand, there could be a downside of approximately 5% if the U.S. Warehouse Clubs count has relatively slow growth and reaches 660 by the end of the forecast period.

For additional details, select a driver above or select a division from the interactive Trefis split for Costco at the top of the page.

BUSINESS SUMMARY

Costco is the second-largest brick-mortar retailer in the U.S. and the largest in the warehouse club category with revenues of $255 billion at the end of fiscal 2024. Costco operates on the business model of charging membership fees from its customers in exchange for heavy discounts on selected brands of a wide variety of merchandise. At February 16, 2025, Costco operated 897 warehouses worldwide: 617 in the United States (U.S.) located in 47 states, Washington, D.C., and Puerto Rico, 109 in Canada, 41 in Mexico, 36 in Japan, 29 in the United Kingdom (U.K.), 19 in Korea, 15 in Australia, 14 in Taiwan, seven in China, five in Spain, two in France, and one each in Iceland, New Zealand, and Sweden

Besides selling merchandise, Costco provides in-store services like fuel, hot-dog stands, and optical centers to attract customers to shop more frequently.

Costco competes with Sam's Club and BJ's in the warehouse club business. Its competitors have a very similar business model. However, BJ's focuses primarily on retail shoppers while Costco and Sam's Club concentrate on small business customers. Thus, Costco primarily competes with Sam's club nationwide while BJ's presence is limited to fewer areas of the US. Warehouse clubs tend to attract business customers with additional rewards and services.

SOURCES OF VALUE

Higher number of warehouses in the U.S. than internationally

The Core Merchandise U.S. segment is the most valuable to the company. Costco has built a strong relationship with its customers and is clearly positioned to thrive in a weak economy. Costco operated about 614 warehouse clubs in the U.S. and 277 warehouse clubs internationally as of the end of FY 2024.

Increasing penetration of executive members

Executive members pay $130 as a membership fee (as opposed to $65 paid by the other members) to get 2% (maximum of $1200) annual rewards on their purchases. They represent more than one-third of Costco's overall customers and two-thirds of its revenues. Executive membership penetration is on an upward trend and has increased from about 45% in 2022 to close to 56% in FY 2024.

International markets present a huge opportunity

Costco has recently expanded in Iceland, New Zealand, and Sweden. It is still expanding in the Asian and Australian markets, where it has a limited presence. Costco has the capability to operate about 100 stores in Taiwan, Korea, and Japan combined and about 20 stores in Australia. It currently has 69 stores in Taiwan, Korea, and Japan combined and 15 stores in Australia. This clearly indicates the expansion opportunity in these selected countries. China and India could be potentially huge markets for future expansion. Other big retailers like Walmart have expressed interest in these markets and are exploring various opportunities to grab a share of the growing retail market in these two economies.

Unique business proposition likely to be received positively in newer markets

Warehouse clubs like Costco present unique opportunities for regular and bulk buyers to save money by buying merchandise discounted at higher rates compared to other retailers. This business model has enabled Costco to thrive despite the weakening economy and is likely to boost sales in developing markets where consumers and businesses are even more cost-conscious.

Focus on e-commerce

Costco has seen tremendous growth in its e-commerce revenues in the recent past. Like other retail chains in the U.S. market, Costco also relies on its store sales for the bulk of its revenues. The retailer earns just 7% ( as of fiscal 2024) of its overall revenues through e-commerce sales. However, this share is likely to go up in the future as the company is deploying several initiatives to develop its web and omnichannel platform.

KEY TRENDS

Threat of self cannibalization exists

Although the company still has scope for expansion in the U.S., we do not negate the possibility of self-cannibalization. Going forward, we expect the U.S. market for the company to saturate in terms of geographic coverage, and expect Costco to focus on international expansion.

Increasing penetration of private label merchandise

The key selling point of Costco is its private label brands such as Kirkland Signature. According to the company, these brands are comparable in quality to national brands and are often cheaper. The retailer has been increasing the share of these brands within its overall product range by 0.5%-0.75% annually. Private label brands accounted for about 23% of Costco's merchandise at the end of 2024.

Competition intensifying in the retail industry

The retail business has become highly competitive. Costco competes with close to 900 warehouse club locations across the world. It faces stiff competition from Wal-Mart, Target, and Amazon in the general merchandise retail segment.