Business Overview

Costco Wholesale Corporation (COST)

7 September 2026

Evidence base: Costco SEC filings held in the research folder — Form 10-K for FY2016 through FY2025, Form 10-Q through FY2026 Q3 (12 weeks ended 10 May 2026), proxy statements and Form 8-K filings — supplemented by independent primary sources: the filings of Walmart, BJ’s Wholesale Club, Kroger, Albertsons, Target, Dollar General and Amazon; US Census Bureau retail and construction data; Bureau of Labor Statistics price, import-price and earnings data; USDA Economic Research Service; the Federal Register; the Office of the US Trade Representative; the Federal Trade Commission; and the Supreme Court of the United States.

Costco’s fiscal 2026 ended 30 August 2026. Only sales for that year have been released; the fiscal 2026 income statement, balance sheet and membership statistics have not yet been reported. Fiscal 2025 is therefore the most recent complete annual evidence, and fiscal 2026 Q3 the most recent complete quarter.

This document explains how the business works. It is not a valuation and not a recommendation.

1. Executive Snapshot

Sources: Costco FY2025 Form 10-K; FY2026 Q3 Form 10-Q; Costco August 2026 sales release (2 September 2026).

2. What the Company Does

The problem Costco solves is a pricing problem, not a convenience problem. A household that buys packaged food, paper goods, fuel and household basics pays a markup at every step of the conventional retail chain, and that markup exists because conventional retailers need it to cover their own operating costs. A supermarket needs a 22–27% gross margin to survive; a mass merchant needs roughly 25–28%. Costco’s proposition is that a household willing to pay an annual fee, buy in larger pack sizes, accept a limited assortment and drive to a large box on the edge of town can buy the same goods at an 11% markup instead. The fee is what makes that arithmetic work.

The unit of economics is one paid household membership, and everything downstream organises around it. In FY2025 Costco had 81.0 million paid households and 145.2 million cardholders (FY2025 10-K). Those households paid $5,323 million in membership fees, or $66 each, and bought $269,912 million of merchandise, or $3,332 each. On that $3,332 of purchases Costco earned $370 of gross margin at an 11.12% rate, and spent $308 on selling, general and administrative costs at a 9.25% rate, leaving $62 of merchandise operating profit. Add the $66 fee and the household produced $128 of operating income — which reconciles exactly to the $10,383 million of reported operating income divided by 81.0 million households (all computed from the FY2025 10-K).

That decomposition is the whole business. A little under half of the profit on each household comes from selling it things; a little over half comes from the household simply agreeing to remain a member. The fee is collected up front and recognised over twelve months, which is why deferred membership fees sit on the balance sheet at $3,157 million (FY2026 Q3 10-Q). The cash arrives before the service is delivered, and the merchandise is frequently sold before Costco has paid for it — accounts payable of $19,783 million exceeded merchandise inventories of $18,116 million at FY2025 year-end, so the working capital cycle is negative and the business funds its own growth.

Tracing one household through a year

The household pays $65 for a Gold Star membership in the United States, or $130 for the Executive tier, which returns 2% of qualified purchases up to $1,250 a year (FY2025 10-K). Executive members were 38.7 million of the 81.0 million paid households at FY2025 year-end — 47.8% — and accounted for 73.6% of worldwide net sales. That 2% reward is recorded as a reduction of net sales, not as an expense: $3,007 million in FY2025. The household then visits a warehouse averaging roughly 147,000 square feet and stocking fewer than 4,000 active SKUs, against 9,000 to 10,000 online. It buys, on average, $3,332 of goods across the year. Costco collects at the register or through the co-branded credit card, on which it earns a royalty on the member’s spending away from Costco.

The warehouse is the second-order unit. There were 914 at FY2025 year-end and 939 in September 2026, each serving roughly 88,600 paid households (computed). Costco discloses average sales per warehouse directly — $272 million in FY2025, normalised for first-year and 53-week effects, up from $159 million in FY2016 (FY2025 10-K, Item 5). Warehouses opened in 2016 or earlier averaged $287 million; those opened in FY2025 averaged $192 million. New units are dilutive to the average for roughly a decade, which is the single most important thing to understand about Costco’s unit growth.

What it sells, and what has moved

Merchandise splits four ways (FY2025 10-K, Note 11). Foods and sundries were 40.6% of net sales, non-foods 26.4%, fresh foods 14.1%, and warehouse ancillary and other businesses 19.0%. The ancillary line is gasoline, pharmacy, optical, food court, hearing aids and tyre installation, plus e-commerce, business centres and Costco Travel. Gasoline alone was approximately 10% of net sales in FY2025, delivered through 747 stations.

Two mix movements matter over the decade. Warehouse ancillary and other businesses rose from roughly 15% of net sales in FY2016 to 20.0% in FY2024, driven mostly by gasoline penetration, which peaked at approximately 14% of net sales in FY2022. Because gasoline carries a much lower gross margin and a much lower operating expense per dollar of sales than the rest of the business, its share swings distort both reported ratios simultaneously — an issue Section 5 returns to. Non-foods, meanwhile, peaked at 29.1% of net sales in FY2021 during the pandemic goods boom and gave the entire gain back by FY2023.

One line was genuinely exited. Costco chartered its own ocean freight during the pandemic supply crunch, then wound the activity down, taking $391 million of charges in FY2023 that cost 16 basis points of gross margin (FY2023 and FY2024 10-Ks). The absence of those charges was worth 16 basis points to FY2024. It is a small example of a general pattern: Costco adds capability when the alternative is unavailable at an acceptable price, and removes it when the market normalises. The Innovel acquisition in March 2020, discussed in Section 5, is the same instinct applied to final-mile delivery.

3. Industry, Competitive Position and Moat

The warehouse club industry exists to strip cost out of the retail chain and hand most of it to the shopper, funding the retailer through a subscription instead of a markup. What is actually sold is not merchandise but access: the right to buy at wholesale-adjacent prices, renewed annually. Three operators of scale exist in the United States. Costco had 647 warehouses in the US and Puerto Rico as of September 2026; Sam’s Club had 601 clubs at the end of its fiscal 2026 (Walmart FY2026 10-K); BJ’s had 263 clubs at the end of its fiscal 2025, rising to 267 by August 2026 (BJ’s filings).

Where the profit pool sits, and who is structurally excluded

The margin structure of US retail explains almost everything about who can and cannot compete on club terms. The table below is assembled entirely from the companies’ own reported figures.

Each figure is from the named company’s own most recent annual report or results release. Ratios are on net sales. BJ’s gross margin is inferred from its reported operating income, membership fee income and SG&A; Costco’s operating margin is on net sales and includes membership fees in the numerator. Sam’s Club is a Walmart reporting segment and does not disclose gross margin, operating expense or membership fee income separately.

The binding constraint is not aggression but arithmetic. Albertsons requires a 27.2% gross margin and still earns 0.9%, because its operating expenses alone consume 26.3% of sales — which is 2.4 times Costco’s entire gross margin. Target’s operating expense ratio of 20.6% is 1.9 times Costco’s gross margin. A supermarket or mass merchant cannot cut its markup to 11% and remain solvent; it is not declining to compete, it is unable to. Dollar General, despite the name, runs the highest gross margin in the table at 30.7%: it achieves a low ticket through small pack sizes and small boxes, not a low markup, and earns its profit on the markup itself. It is a convenience format, and the opposite of the club model.

The mechanism behind Costco’s position is volume per building. Dividing each company’s net sales by its unit count gives $316.6 million per Costco warehouse (FY2026), $154.8 million per Sam’s Club and $79.7 million per BJ’s club — a ratio of roughly four to two to one. Occupancy, utilities, club management and a large part of the labour bill do not scale with volume. Four times the throughput through one box is what pays for an operating expense ratio 5.8 percentage points below BJ’s, which is what funds a gross margin 5.4 percentage points below BJ’s, which is the price gap the member actually experiences. The low price is the output of the cost structure, not the input.

The relevant market is local, which changes what share means

National share statistics are close to meaningless here. The Federal Trade Commission has treated grocery retail geographic markets as highly localised, alleging in one case a market “as small as approximately five or six miles in radius”, and has generally not included club formats in supermarket market definitions at all (FTC submission to the OECD, 2015). BJ’s disclosed in an earlier filing that approximately 85% of its full-size clubs had at least one competing club within about ten miles. A club is a portfolio of overlapping ten-mile local positions, not one national franchise. Where a competitor has density — BJ’s states it operates nearly three times the club count of the next largest club competitor in New England — Costco’s economics are contested. Where it does not, they are not.

Which barriers actually bind

Siting binds as a cost and pace constraint rather than an absolute one. A club needs ten to fourteen acres (BJ’s FY2025 10-K). Costco’s own risk disclosure names land-use regulation, community opposition, and — newly in FY2025 — difficulty securing long-term utility contracts for new buildings given growth in electricity demand and water stress. US private commercial construction put in place was down 4.7% year on year in July 2026 (Census Bureau C30). Yet all three operators are still opening: Costco went from 540 warehouses in FY2010 to 939 in FY2026, BJ’s from 189 to 263, and Sam’s Club plans roughly fifteen clubs a year. Sites are being secured. What binds is something else.

No fourth warehouse club of scale has entered the United States in the last twenty years — no primary source consulted records one. Sam’s Club closed 63 clubs in January 2018 and, at 601 clubs eight years later, has a net gain of four. The genuine barrier is the combination of a ten-mile trade area already served by an incumbent with a fee-paying base renewing at 90% or better, and the requirement to match an 11% gross margin from opening day with no membership annuity yet built. An entrant must fund the price gap out of equity for years before density arrives. That is a harder problem than finding land.

What would be hardest to reproduce

Three things, in order. First, the volume density itself, which took four decades to build and cannot be bought. Second, the real estate: Costco owns the building at 866 of its 914 warehouses and owns both land and building at 725 of them, leasing both at only 48 (FY2025 10-K, Item 2). It is not exposed to landlord renewal on 95% of its estate. Third, the renewal base — 92.3% in the US and Canada at FY2025 year-end, against BJ’s 90% measured only on tenured members, which excludes the highest-churn first-year cohort. Sam’s Club discloses no renewal rate at all.

Costco names its competitors as other retailers and warehouse club operators, and the outside evidence supports its cost claim while leaving two of its assertions unverified. The markup gap is verifiable and large. Item-level price leadership is not — no primary basket comparison exists, and Costco’s gross margin actually rose from 10.92% to 11.12% between FY2024 and FY2025, which sits awkwardly beside a claim to be minimising price. The Kirkland Signature margin premium is stated in the filings but never quantified: Costco has never disclosed a private-label penetration percentage or a margin differential, in any year. BJ’s discloses its own private label at 27% of net sales excluding gasoline, which is the only channel benchmark available.

The evidence points to three conditions for winning in this channel: the lowest gross margin requirement in the market, a recurring fee that funds the price gap, and the highest sales per box to amortise fixed cost. Costco meets all three by the widest margin in the channel. The qualification is that all three are defences against store-based competitors. Amazon’s North America segment earned a 6.9% operating margin in 2025 and its subscription revenue of $49.6 billion is 9.3 times Costco’s entire membership fee income — a competitor with a fatter profit and loss account, a larger membership annuity, and no fourteen-acre siting problem. Section 7 returns to this.

4. Growth Engine

Costco grew net sales 10.2% in fiscal 2026, to $297.3 billion (August 2026 sales release). That number is a poor description of the business, and the company supplies the tools to take it apart.

Costco August 2026 sales release (2 September 2026) and FY2025 10-K. The new-warehouse contribution is the residual between reported net sales growth and reported comparable sales growth, and is therefore approximate.

Acquisitions do not feature. In a decade Costco has made two transactions of any size — Innovel Solutions for $998 million in March 2020 and the buyout of its Taiwan minority partner for $1,050 million in June 2022 — against $269.9 billion of FY2025 revenue. Reported growth and organic growth are therefore the same thing at the corporate level, which is unusual and worth stating plainly. The distortion in Costco’s headline numbers comes not from acquisition accounting but from two things that move on their own: the price of gasoline and the value of the dollar.

Both were headwinds in FY2025 and tailwinds in FY2026. In FY2025 gasoline price deflation removed $2,329 million of net sales, 93 basis points, and currency removed $1,943 million, 78 basis points. By the third quarter of FY2026 the average price per gallon was up 20%, adding 221 basis points to net sales, while currency added 104 basis points. Roughly three of the twelve points of Q3 net sales growth, and 2.2 of the ten points of reported comparable sales, came from the gasoline price alone. An investor reading the reported line without the adjusted line is reading the oil market.

The drivers, ranked

• New warehouses — structural. Twenty-five net new units in FY2026, or 2.7% of the base, worth roughly 1.8 points of net sales growth. This lever is slowly weakening on management’s own account: it states that as the base grows and desirable sites become harder to secure, square footage growth becomes a comparatively less substantial component of growth, that new warehouses open at lower initial profitability, and that they cannibalise sales at existing warehouses when opened in existing markets. The disclosed vintage data confirms it — FY2025 openings averaged $192 million of sales against $287 million for warehouses opened in 2016 or earlier.
• Paid household growth and shopping frequency — structural. Paid households rose from 81.0 million at FY2025 year-end to 82.9 million by Q3 FY2026, up 4.1% year on year, and cardholders to 148.5 million. Frequency is the higher-quality half of the comp, and it is decelerating: shopping frequency grew 5% in FY2025, then 3% in each of the first two quarters of FY2026, then 2% in the third.
• Executive membership upgrade — management-driven. Executive members were 39% of paid members in FY2016 and 47.8% in FY2025, and they generate 73.6% of worldwide net sales. Each upgrade doubles the annual fee from $65 to $130 in the US, against a 2% reward capped at $1,250. Costco named upgrades to Executive membership as a driver of fee growth for the first time in Q3 FY2026, and has added Executive-only shopping hours in the US. The lever is real but finite — it ends when penetration stops rising.
• Membership fee increases — management-driven and episodic. There have been exactly two in the decade. On 1 June 2017 the US fee went from $55 to $60, Executive from $110 to $120, and the reward cap from $750 to $1,000; the increase was worth approximately $178 million in FY2018. On 1 September 2024 the fee went from $60 to $65, Executive from $120 to $130, and the cap to $1,250; Costco guided to approximately $370 million over two years. The cadence is roughly seven years, and the second increase has now fully lapped — it supplied about 40% of membership income growth in FY2025, about 35% in Q2 FY2026 and about 25% in Q3.
• International expansion — structural. At FY2025 year-end 285 of 914 warehouses, 31% of the estate, were outside the United States, generating 27% of net sales and 34% of operating income. The mix is favourable: the Canada segment earned a 5.01% operating margin and Other International 4.33%, against 3.44% in the United States (computed from FY2025 segment disclosure). Growth outside the US is margin-accretive at the segment level.
• Digitally-enabled sales — structural, but small and dilutive to margin. E-commerce was approximately 7% of net sales in FY2025 and digitally-enabled sales approximately 10%; the digitally-enabled comparable sales metric grew 20.9% in FY2026. Costco states plainly that this business carries a lower gross margin percentage than its warehouse operations, so mix shift here is a margin headwind even as it is a growth tailwind. Note also that the metric was redefined in FY2026 to include Costco Travel, so it is not on the same basis as the FY2025 e-commerce figure.
• Gasoline price and currency — cyclical. Worth 1.8 points of the FY2026 comparable sales figure and nothing at all to the underlying business. This is the driver most likely to be mistaken for one of the others.

5. Margin, Cash and Capital Allocation

The most important thing that has happened to Costco’s economics over the last decade is not visible in the headline margin, which barely moved. It is visible in what the margin is made of.

Costco 10-K filings for the years shown. All four are 52-week years, chosen to avoid the 53-week distortions in FY2017 and FY2023. Three comparability breaks apply. From FY2022 preopening expenses were folded into SG&A with prior years restated, which raised FY2020 SG&A from $16,332m to $16,387m — roughly three basis points. The FY2019 adoption of ASC 606 grossed up net sales by $1,332m with only an $8m effect on gross margin, so ratios before and after FY2019 are not exactly comparable. Most importantly, gasoline was approximately 14% of net sales in FY2022 against roughly 9% in FY2020 and 10% in FY2025; excluding gasoline price inflation, FY2022 gross margin was 10.94%, not the 10.48% reported.

The merchandise operation has become the growth engine of the profit

Membership fees supplied 72.1% of operating income in FY2016 and 51.3% in FY2025. The familiar claim that Costco makes all its money on membership fees was close to true a decade ago and is becoming less true every year. The mechanism is the gap between gross margin and SG&A — what the merchandise operation earns before the fee is added. That spread was 0.95% of net sales in FY2016 and 1.87% in FY2025. In dollars, merchandise operating contribution rose from $1,026 million to $5,060 million, a factor of 4.9, while membership fees rose by a factor of 2.0.

The reason is operating leverage on a fixed cost base. Sales per warehouse rose from $159 million to $272 million on the company’s own normalised measure, while the cost of running a warehouse — occupancy, utilities, management, a substantial part of the labour — did not rise proportionally. SG&A fell from 10.40% of net sales to 9.25% even while Costco was raising wages faster than the retail industry. The consequence is that Costco today is more genuinely a retailer, and less purely a subscription business, than it was in 2016. That is a better business, and also a more exposed one, because merchandise profit can be competed away and a fee cannot.

Cost drivers and cash conversion

Compensation and benefits is the largest expense after merchandise itself. Costco increased the US and Canada starting wage to at least $20.00 an hour in March 2025 and raised the top of its wage scales by $1.00, bringing the average US hourly rate to approximately $32.00 at FY2025 year-end. Its stated philosophy is not to minimise wages and benefits, and it acknowledges this may cause it to absorb costs other employers would pass through to their workforces. Employee retention was approximately 94% for staff with more than a year of service. Note that fresh-foods and certain ancillary labour sits in merchandise costs rather than SG&A, so the reported SG&A ratio understates the true labour bill.

Cash conversion is exceptional and comes from the payables cycle rather than from margin. Accounts payable of $19,783 million exceeded merchandise inventories of $18,116 million at FY2025 year-end — 109% — and inventory turned 13.0 times, or every 28 days (computed). Costco states it often sells inventory before it is required to pay for it while still taking early-payment discounts. FY2025 operating cash flow was $13,335 million against $5,498 million of capital expenditure, leaving $7,837 million of free cash flow. Through the first 36 weeks of FY2026, operating cash flow reached $11,133 million, but $2,498 million of that was an accounts payable source against $604 million in the prior year, which management attributed to faster inventory turns and improved payment terms with suppliers. That is a balance sheet stretch, and it does not repeat at the same size.

The balance sheet carries no financial risk to speak of. Total debt was approximately $5,766 million at Q3 FY2026 against cash and short-term investments of $19,996 million — net cash of roughly $14.2 billion. All long-term debt is fixed rate. Costco has never disclosed a leverage target, and on these figures does not need one. Capital expenditure is guided to approximately $6,500 million for FY2026, with an explicit new emphasis on expanding the depot network. The maintenance-versus-growth split of that capex has never been disclosed.

Where the cash went, and what that reveals

Over the ten fiscal years FY2016 to FY2025, ranked: capital expenditure of approximately $35.9 billion, dividends of approximately $27.6 billion, share repurchases of approximately $4.9 billion, acquisitions of approximately $2.0 billion, and net debt paydown of essentially nothing — total debt was $5,161 million in FY2016 and $5,788 million in FY2025 (computed from the cash flow statements and balance sheets of the relevant 10-Ks).

Three things follow. First, the warehouse comes before everything: more than half of all discretionary cash went into the ground. Second, Costco returns surplus capital through lumpy special dividends rather than buybacks. Roughly $14.2 billion of the $27.6 billion of dividends were three special payments — $7.00 a share in May 2017, $10.00 in December 2020, and $15.00 in January 2024 — alongside an ordinary quarterly dividend raised every April for a decade, from $0.45 in 2016 to $1.47 in April 2026, or $5.88 annualised. Third, buybacks are not a capital return programme at all: $4.9 billion over ten years against $13.3 billion of operating cash flow in FY2025 alone, and shares outstanding actually rose from 437.5 million to 443.2 million over the period. Repurchases have not even offset equity compensation dilution.

The behaviour describes management that treats the share count as a housekeeping matter, refuses to use the balance sheet, and hands back what it cannot deploy in a form that makes no commitment about the future. It is consistent with a low-margin operator that regards financial flexibility as an operating asset. The same conservatism shows in the incentive structure: the chief executive’s maximum cash bonus for FY2026 was set at $1.12 million, split between sales, pre-tax income and environmental and social targets (Form 8-K, 20 October 2025). No transaction has been announced and not yet closed as of the most recent filing.

6. Cyclicality, Constraints and What to Monitor

Costco is a low-cyclicality business by the evidence of the last recession, but it is not currently at a low point in its own cycle, and the reported figures and the underlying figures are pointing in opposite directions.

Where the business sits right now

Reported comparable sales of 8.4% in fiscal 2026 are the highest of the last decade, against 3% in FY2023, 5% in FY2024 and 6% in FY2025. On the adjusted basis — excluding gasoline prices and currency — the picture reverses: 6% in FY2024, 8% in FY2025, and 6.6% in FY2026. Underlying growth decelerated in the year the headline accelerated.

Three further measures point the same way. Shopping frequency fell from 5% growth in FY2025 to 3% in the first two quarters of FY2026 and 2% in the third, while average ticket rose 7% in Q3 — but on figures inflated by the same gasoline and currency effects. Membership fee growth slowed from 14% in each of the first two quarters to 11% in the third as the September 2024 increase lapped. And core merchandise gross margin, expressed as a percentage of core merchandise sales, ran plus 30 basis points in Q1 and plus 22 in Q2 before turning negative nine basis points in Q3 — the first negative quarter of the year, driven by fresh foods and foods and sundries. Gross margin of 11.12% in FY2025 sits near the top of its ten-year range, which ran from 11.35% in FY2016 to 10.48% in FY2022.

The honest reading is that Costco is at or near a peak on reported metrics, decelerating on every underlying one, and drawing an unusual amount of its headline growth from two variables it does not control.

End-market exposure and what it means in a downturn

Foods and sundries were 40.6% of FY2025 net sales, non-foods 26.4%, fresh foods 14.1% and warehouse ancillary and other businesses 19.0%, with gasoline alone approximately 10%. Roughly 55% of sales is therefore food, which is the most defensive category in retail. Geographically, the United States and Canada produced 86% of net sales and 84% of operating income, and California alone 26% of US net sales — a concentration Costco names as a risk factor in its own right.

The 2008 to 2010 evidence is the most useful outside data available. Costco’s total comparable sales fell 4% in FY2009 and its US comp fell 2%, but the reported decline was substantially gasoline deflation and currency. BJ’s merchandise comparable sales excluding gasoline held at plus 4.0% in the recession year while Walmart’s US comp fell 0.7% — a spread of nearly five points in the club format’s favour. Sam’s Club segment operating income fell only 8.1% from peak to trough. Most tellingly, membership fee income never declined at either company: Costco’s went $1,506 million, $1,533 million, $1,691 million through the worst of it, and BJ’s $175.1 million, $179.6 million, $190.7 million. Merchandise comps cycle; the annuity does not.

The constraint that would actually bite

The plausible downside is not a demand collapse but a forced choice. In a period of cost inflation that Costco elects not to pass through — which is what its stated pricing philosophy commits it to — it must either hold price and accept lower gross margin, or hold margin and accept slower comparable sales. BJ’s is already visibly making the first choice: its merchandise gross margin fell 20 basis points in Q2 FY2026 on what it called continued investments in pricing. Costco’s own core merchandise margin has already turned negative in Q3 FY2026. On a business whose entire merchandise operating contribution is 1.87% of net sales, a sustained 20 basis point give-back is roughly $540 million, or about eleven percent of that contribution.

The physical constraint is unit growth. Costco added twenty-five net warehouses in FY2026, or 2.7% of the base, and the plan for the year was trimmed during it — from thirty-three openings implied at Q1 to twenty-nine at Q3. A club requires ten to fourteen acres. Costco added a new constraint to its FY2025 risk disclosure that did not appear before: difficulty securing long-term utility contracts for new buildings, given growth in global electricity demand and water stress in certain regions. Unit growth is already the smallest of the three main growth levers; a binding siting or utility constraint removes the only one that does not depend on charging existing members more.

Durable versus borrowed

Costco FY2025 10-K and FY2026 Q1–Q3 10-Qs.

Leading indicators, and where they are published

7. Risks, Unknowns and Questions for Deeper Work

Cyclicality is covered in Section 6 and is not repeated here. What follows is what cyclicality does not capture — and the first two items compound with each other, because both attack the merchandise half of the profit at a moment when the merchandise half has become the growing half.

• A tariff refund Costco may not be allowed to keep. On 20 February 2026 the Supreme Court held in Learning Resources v. Trump that the International Emergency Economic Powers Act does not authorise the President to impose tariffs, invalidating the programmes issued under it. Refunds of duties paid under those programmes therefore exist. In March 2026 four class actions were filed against Costco — in the Northern District of Illinois, King County Superior Court, the District of Puerto Rico and the Western District of Washington — asserting that refunds of tariffs Costco paid and passed on to members through higher prices belong to the members. BJ’s has already recognised tariff refund benefits in its gross margin; Walmart states it has recognised none; Costco discloses no receivable and only an immaterial accrual. The mechanism is a one-off margin benefit that a direct competitor books and Costco may be obliged to hand back — on a business earning 3.85% at the operating line.
• A competitor that earns more and has no boxes. Amazon’s North America segment earned a 6.9% operating margin in 2025, against Costco’s approximately 3.85%, and its subscription revenue of $49.6 billion grew 14.1% — 9.3 times Costco’s entire membership fee income, growing faster. US e-commerce reached 17.1% of retail sales in Q2 2026 and is compounding at 12.2% against 6.7% for total retail, taking roughly 0.8 points of share a year (Census Bureau). Every structural advantage described in Section 3 — volume per box, owned real estate, siting scarcity — is a defence against store-based competitors. Against a higher-margin operator with a larger membership annuity and no fourteen-acre land requirement, the relevant defence is only the price gap itself, and price gaps are funded from a 1.87% merchandise spread.
• Operating leverage running backwards. Costco states the point itself: because the business operates on very low margins, modest changes in merchandise costs and SG&A can have substantial impacts on net income. The decade’s margin improvement came from spreading fixed warehouse cost over rising volume per box, and new units join that base well below the mature average. If sales density stops rising, the same mechanism runs the other way, and it does so on an expense base that Section 5 shows is structurally rigid. This is the risk that the strong FY2016-to-FY2025 margin record makes hardest to see.
• A wage base that only moves one way. The March 2021 permanent wage increase alone cost approximately $400 million annualised, and Costco has raised wages in most years since, reaching a $20.00 starting rate and approximately $32.00 average US hourly rate. Retail average hourly earnings rose 3.2% in the year to August 2026 while food-at-home prices rose 2.7% (Bureau of Labor Statistics) — labour cost outrunning grocery price inflation. Costco has explicitly committed to absorbing costs other employers pass through. On a 9.25% SG&A ratio, sustained real wage growth is a permanent, non-reversible headwind that cannot be managed away without abandoning the labour model that produces 94% retention.
• The fee lever is slow and the renewal rate has begun to drift. Two US increases in a decade, seven years apart, and the second is fully lapped. The US and Canada renewal rate slipped from 92.3% at FY2025 year-end to 92.2% by Q3 FY2026, which Costco attributes to a higher number of memberships sold online, including through digital promotions, that renew at a slightly lower rate. The mechanism matters more than the ten basis points: the cheapest channel for adding members is producing a structurally lower-quality member, and the growth in paid households is increasingly coming through it.
• An undisclosed dependence on a single brand. Costco states that Kirkland Signature products generally carry higher margins than national brands and represent a growing portion of overall sales, and names loss of member acceptance of the brand as a risk to sales and gross margin. It has never disclosed the penetration percentage or the margin differential, in any filing in the ten years reviewed. An investor therefore cannot size the exposure. Two consumer class actions filed in late 2025 allege Kirkland Signature tequila was mislabelled; the dollar exposure is not quantified.

What the sources could not answer

These are findings, not omissions. Each would need resolving before an investor could size the business properly.

• Kirkland Signature penetration as a percentage of sales, and the margin differential against national brands. Never disclosed by Costco in any year reviewed. BJ’s discloses its own private label at 27% of net sales excluding gasoline, which is the only benchmark in the channel.
• The split of capital expenditure between maintenance and growth. Never disclosed, which makes true free cash flow after maintaining the existing estate impossible to calculate.
• Gasoline gross profit in dollars, or any gasoline-specific margin. Only the basis-point distortion to consolidated ratios is given, so the profitability of roughly 10% of net sales is unknown.
• Sam’s Club membership fee income. Walmart does not break it out, so the single most important line in the second-largest US club’s profit and loss account cannot be seen, and no reliable competitive comparison of fee economics is possible.
• Executive member count for FY2026. Last disclosed at 38.7 million, or 47.8% of paid members, at FY2025 year-end. Since Executive mix is one of the three main growth levers, its current level is a material gap.
• Any quantified tariff cost. Costco discloses only that higher tariffs are more likely to hurt than help, with no dollar or basis-point figure in any FY2026 filing.
• A primary price comparison against competitors. No basket-level study from a primary source exists, so Costco’s claim to price leadership at the item level is unverifiable — what is verifiable is the markup, not the shelf price.
• The fiscal 2026 income statement, balance sheet and membership statistics. Fiscal 2026 ended 30 August 2026 and only sales have been released, so the most recent complete annual picture remains FY2025.

8. Investor Takeaways

• What this business really is: a subscription business that uses merchandise as the reason to renew — though less purely so each year, as merchandise profit grows faster than fee income.
• The core economic engine: roughly four times the sales volume per building of the nearest club competitor, which funds an operating expense ratio low enough to sell at a markup no conventional retailer can survive.
• The main growth lever: paid household growth and Executive-tier mix, supplemented by a fee increase roughly every seven years and by unit growth of under 3% a year that is slowly getting harder.
• What could break the story: a competitor that earns a higher margin and carries no real estate — the price gap is funded from a merchandise spread of 1.87% of sales, and every other defence is aimed at store-based rivals.
• What to monitor: comparable sales excluding gasoline and currency, shopping frequency against average ticket, and core merchandise gross margin — all three of which decelerated through fiscal 2026 while the reported figures accelerated.