Costco

Following a monstrous run over the last five years that saw the share price outperform the S&P 500, shares of Costco Wholesale (COST -0.89%) have cooled off in 2025. The stock is roughly flat year to date after surging to a 52-week high of $1,078 earlier this year.

Costco shares have trailed the bull market rally in recent months. The only thing investors can blame is the stock’s high valuation. At a price-to-earnings (P/E) ratio of 50, the stock is the most expensive it’s been in 25 years. But sometimes stocks can trade for years at extended valuation levels. Costco’s exceptional operating performance and superb leadership certainly are deserving of a premium valuation.

While the stock could be in the process of settling at a lower P/E, there are two things about Costco’s business that make me interested in the stock even if it’s historically expensive.

Image source: Getty Images.

1. World-class operating efficiency

Costco has 81 million paying warehouse club members because it sells stuff in bulk cheaper than anyone else. Some investors might assume Costco prioritizes keeping its margins at a fixed level and reinvesting any cost savings in lower prices. While this is the basic strategy, Costco is still seeing its margins gradually rise.

Over the past 10 years, the company’s operating margin has improved from 3.1% to 3.8%. It has ticked up about 0.1% almost every year. This reflects several initiatives to improve operating efficiency, including automation, streamlining the checkout process, and continued growth in its private label brand Kirkland Signature, where sales continue to outpace Costco’s overall sales growth.

Costco capped off another solid year in terms of margin and operating profit growth. For fiscal 2025 (which ended in August), operating income grew 12% year over year, slightly above its past 10-year average annual increase of 11%. Earnings per share (EPS) grew 14% year over year excluding a tax benefit last year.

Consistency is a key element that can cause investors to award a premium valuation to a company. Next year, analysts expect Costco’s sales and adjusted earnings to grow 8% and 16%, respectively. The continued growth of Kirkland, which generates higher margins than other brands, and Costco’s culture of relentlessly squeezing every last ounce of inefficiency out of operations should maintain its recent trend of improving operating margin and earnings growth.

2. International opportunity

Perhaps the biggest factor that may cause the market to continue valuing Costco at a higher-than-average P/E is global expansion. Only 31% of Costco’s warehouse stores are outside the U.S., yet its discount operating model and global sourcing capabilities could pave the way for profitable international growth.

Costco currently has 914 warehouses worldwide, with 629 in the U.S. It plans to increase this base to 944 in fiscal 2026. Opening warehouses in foreign markets requires longer planning than in the U.S., but the company has a pipeline of openings it is pursuing internationally.

Current international stores are performing well. In the most recent quarter, its adjusted comparable-store sales in Canada grew 8.3% year over year, with other international markets up 7.2%. This was marginally higher than its U.S. comp-sales growth of 6%. Strong international growth prospects extend Costco’s ability to maintain consistent performance for many years.

But Costco is still finding plenty of room to expand on its home turf. Over the next year, two-thirds of its planned warehouse increase will be in the U.S. The combination of improving margins and growth opportunities at home and abroad justifies a high valuation.

Beyond numbers and growth opportunities, Costco’s corporate culture is just something you cannot pin to a specific P/E. The company’s consistent performance reflects a management team that is focused on one thing: delivering more value to customers. The fact it is succeeding on that mission while still improving margins makes Costco a highly valuable business.

Costco is one of a kind, and that’s why the stock still looks like a tempting buy even if it’s expensive.

Costco Wholesale (COST -0.78%) is not only one of America’s favorite retailers. It’s also been a top retail stock to own over its history.

Over the last decade, it’s up 570%, easily outpacing the S&P 500‘s increase of 240%, and most investors would argue that Costco is lower-risk than the broad-based index. After all, the retailer is a classic defensive stock. As a consumer staples company, it sells primarily products that people need, like groceries, paper products, and health and beauty products. It’s also known for its buy-in-bulk bargain prices, which attract consumers in both good times and bad.

Costco has actually underperformed the market this year as it’s up just 4% through Sept. 19, pulling back from its recent peak. Is this a buying opportunity for the retail giant? Let’s take a look at the arguments to buy, sell, or hold Costco.

Image source: Getty Images.

Buy Costco

Costco is one of the most, if not the most, reliable retailers in the industry. It’s the leader in the membership-based warehouse retail sector, well ahead of competitors like BJ Wholesale and Walmart‘s Sam’s Club.

Costco regularly ranks among the top in customer satisfaction among retailers, and it has a strong renewal rate, at 93% in fiscal 2024 in North America and 90.5% globally.

Costco’s business model has also proven to be rock-solid in any market, and its low prices keep customers coming back. The company makes most of its net income through membership fees, essentially selling goods at near-cost to incentivize buying memberships.

That’s created a wide economic moat as it has grown its membership base by about 10% annually in recent years. Costco is also continuing to open new stores, expanding its footprint in the U.S. and internationally. Given the demand for new stores, as well as its growth in e-commerce, Costco’s growth runway appears to be longer than it is for most large retailers.

And given the stability of its business, Costco is a great bet to deliver steady growth, which is why it trades at a premium.

Additionally, Costco also has a track record of paying special dividends every three years or so, rewarding shareholders.

Sell Costco

Costco’s results speak for themselves. The company has a long track record of delivering steady same-store sales growth and expanding profits.

However, Costco’s growth seems to be generously priced into the stock at this point as it trades at a price-to-earnings ratio of 54, which is more expensive than about any other brick-and-mortar retailer.

Costco trades at a premium in part because the business is so reliable, but the stock’s growth has been driven over the years by multiple expansion, rather than just earnings growth. A stock can’t grow like that forever, and that might explain why Costco has underperformed the S&P 500 this year.

A good business alone isn’t enough of a reason to buy a stock. It has to trade at a good value as well.

Hold Costco

Costco is a classic buy-and-hold stock. While it could go through ups and downs according to market trends and company-specific events, it has a business model that should continue to endure despite pressure from e-commerce or potential economic turmoil.

Given the balance between the success of the business and the high valuation, holding the stock makes sense.

What’s the verdict?

Under normal circumstances, there’s a good argument for Costco being a long-term buy, but the stock is expensive enough, at double the price-to-earnings ratio of the S&P 500, that there’s better value to find elsewhere.

Holding Costco looks like the best option now. While it could underperform the market in the short or even medium term, it still looks like a winner over the long term.

Costco Wholesale (COST -0.84%) is one of the most successful retail stocks in history. It launched its IPO in 1985 at a split-adjusted $1.67 per share, meaning it has risen 575-fold during its 40-year trading history. Amid its 205% stock price growth over the last five years, it outperformed the S&P 500 during that time, and one might assume it can surpass the index again in the next five.

Nonetheless, its past performance is not a guarantee that the retail stock will repeat or exceed its returns. Thus, investors need to take a closer look at the company and its financials before making such a determination. Let’s do that now.

Image source: Getty Images.

The state of Costco

Without a doubt, Costco’s business model helps make it one of the world’s most successful retailers. That fee, which is as low as $65 per year in the U.S., allows customers to purchase desired, high-quality bulk goods at a price that is little more than the cost of goods sold plus overhead.

More importantly, it has developed a business culture that seems to work no matter where Costco tries it. As of its fiscal 2025’s third quarter (ended May 11), 629 of Costco’s 914 stores were in 47 U.S. states. Thus, as the U.S. market becomes more saturated, Costco could potentially drive decades of growth in other countries.

This stands in contrast to retailers like Target and Home Depot, which failed to adapt their business cultures to work outside of their home regions. Since both companies lack obvious avenues for higher growth, Costco seems to have the best growth prospects among the brick-and-mortar retailers with nationwide footprints in the U.S.

Why some investors might hesitate to buy Costco

Unfortunately for new investors, the investment community already has a wide appreciation of Costco’s success. Its price-to-earnings (P/E) ratio of 54 demonstrates its popularity, which far outpaces its largest competitors’.

COST PE Ratio data by YCharts.

Moreover, in 2025, the earnings multiple briefly exceeded 60, its highest level since the stock market bubble of the late 1990s and early 2000s.

Although Costco is on track for continued prosperity, one must question whether its growth rate justifies the earnings multiple. The company planned to expand by 24 warehouses in fiscal 2025, but that amounts to less than a 3% annual increase.

Additionally, while its financial growth is steady, it remains in the single digits. In the first nine months of fiscal 2025, net sales of $189 billion rose 8% compared to the same period in fiscal 2024.

Although it kept cost and expense growth in check, interest income fell just as its tax burden rose. Thus, its $5.5 billion in net income for the first three quarters of the year rose by 9%.

While such growth levels bode well for the company, one might question whether they justify a 54 P/E ratio. Looking ahead, analysts foresee growth levels taking the forward P/E ratio of 48 and a forward one-year earnings multiple of 43.

At that rate of increase, it could take Costco approximately five years to reach the S&P 500’s average earnings multiple of 31. History shows that Costco tends to beat that average, but even if its P/E ratio fell to 40, it could bode poorly for the company’s five-year growth trajectory.

Where will Costco be in five years?

Given what we know about Costco’s financials, investors should expect Costco to trade at a higher price than it does today, albeit with returns that underperform the S&P 500.

Admittedly, a lot can change in five years, and changes may occur that we cannot predict today. Thus, investors should not discount the possibility of an unforeseen event that either bolsters or undermines the current investment thesis.

Nonetheless, the company’s growth and financials do not appear to justify a 54 P/E ratio. Hence, that earnings multiple is likely to come down over time, reducing the stock’s return. While Costco likely remains a hold for its longer-term investors, people should probably put their existing cash to work elsewhere.

If you thought artificial intelligence (AI) has a sizable addressable market, take a gander at the retail industry. Based on estimates from Mordor Intelligence, the global retail industry will grow from an estimated $27.3 trillion this year to about $36.9 trillion by the turn of the decade.

With an addressable market this massive, it should come as no surprise that retail is one of the most competitive industries on the planet. However, there are a handful of retail standouts, including e-commerce giant Amazon, superstore chain Walmart, and of course warehouse club Costco Wholesale (COST 0.64%).

While Amazon and Walmart have (mostly) grown their respective businesses traditionally, Costco is the oddball of the bunch. It’s known for its quirky deals, such as the $1.50 hot-dog combo for members, generous return policy, and its penchant for selling one-of-a-kind and unexpected items, such as gold bars and luxury jewelry.

Image source: Costco.

Costco’s 79.6 million paying members, as of the end of the fiscal third quarter (May 11, 2025), have come to expect these perks and surprises. But a new rule is a complete game-changer for many of its paying cardholders.

Costco’s executive members just earned a lucrative new perk

To shop in one of Costco’s more than 900 warehouse locations, you’ll need a membership. Approximately 42 million of its paid membership are gold star and business level, which each carry a $65 annual cost. The remaining 37.6 million are executive level, which carries twice the annual cost ($130), but also lays on the perks.

According to Costco, its executive members can earn up to 2% back on most purchases totaling up to $1,250 annually, as well as receive a monthly credit of $10 for eligible delivery orders topping $150. Executive cardholders may also qualify for discounts on Costco travel packages.

The reason the company caters to this group is because they’re responsible for the bulk of net sales. Despite accounting for “just” 47% of total memberships, executive cardholders were responsible for approximately 73% of sales during the fiscal third quarter. Keeping these folks happy and sustaining annual renewal rates above 90% is key to Costco’s success.

But a newly announced perk for executive members, which was unveiled in June but only fully implemented earlier this week, is bound to turn heads.

On June 11, Costco revealed plans to allow its executive cardholders exclusive shopping hours seven days a week in its more than 600 U.S. warehouses. On weekdays and Sundays, only executive members will be allowed to enter its warehouses from 9 a.m. to 10 a.m., with this exclusive shopping window narrowed to 30 minutes (9 a.m. to 9:30 a.m.) on Saturdays. Though this policy technically went into effect at the end of June, there had been a two-month grace period where gold star and business members were allowed in. This isn’t the case any longer.

While some non-executive members have expressed frustration with this new policy, it’s a smart move by Costco to put the proverbial carrot at the end of the stick and encourage existing gold star and business members to upgrade.

Image source: Getty Images.

Membership fees are a key ingredient to Costco’s competitive edge

Though membership fees aren’t the only factor responsible for making Costco such a successful growth stock and phenomenal multidecade investment, they play an undeniably important role.

Groceries act as the primary lure responsible for getting people into Costco’s warehouses. However, food and beverages traditionally sport razor-thin margins. Since membership fees flow almost entirely to Costco’s bottom line, they can be used as something of a buffer to offset the minuscule margins tied to groceries.

Arguably even more important, membership fees afford Costco a pricing buffer. Management understands fully that members of all levels expect various perks, including prices on most groceries that’ll undercut traditional mom and pop shops and national grocery chains. The membership fees Costco receives are one of the reasons it can keep prices on basic need goods so comparatively low. It’s something of a repeating cycle that works in the company’s favor.

Costco Wholesale’s size shouldn’t be overlooked, either. When a company has deep pockets, it’s often able to buy products in bulk, which reduces the per-unit cost for each item. These lower costs can then be passed along to its members as a key perk to shopping in its warehouses.

Even though cardholders are likely heading to Costco for groceries and other household necessities, it only takes a handful of higher-margin discretionary purchases for the company to benefit. It also doesn’t hurt when members buy Costco’s private-label brand, Kirkland Signature, which tends to boast premium margins, relative to comparable products.

There’s no denying this formula works. Just over 90% of its worldwide customers renewed their memberships, based on fiscal third-quarter data, with an even higher 92.7% renewal rate in the U.S. and Canada. It also boasts exceptional membership pricing power, with the number of paid memberships growing following a fee increase on Sept. 1, 2024.

There’s a reason investors have been paying a traditionally head-scratching (for a retail company) forward-year earnings multiple of 47 to buy shares of Costco stock. Given its array of competitive advantages, and the exceptional loyalty of its shoppers, there’s a good likelihood this new perk is going to mint even more executive level cardholders in the quarters that lie ahead.

Lululemon Athletica (LULU -0.80%) is suing Costco Wholesale (COST 1.08%) for selling similar, knock-off products in its warehouses. For the high-end apparel company, how this ends up playing out could be a make-or-break moment for its stock.

Shares of Lululemon are down close to 50% this year as investors have grown concerned with the company’s lackluster growth and worrisome exposure to China. The stock hasn’t been trading at these levels since 2020, and depending on your outlook for the business in the long run, Lululemon could either be a steal of a deal right now, or nothing more than a value trap.

What could end up determining that is its battle with Costco.

Image source: Getty Images.

Why the Costco lawsuit could be critical for Lululemon

Lululemon is alleging that Costco has been selling “dupes” of its products and that they are confusing its customers. The suit claims that Costco has infringed on Lululemon’s intellectual property due to how similar the items are, and that they go beyond just selling similar types of clothing. It says that Costco is also using the same color names, such as “Tidewater Teal,” which Lululemon says, “is an important component” of its business.

If Costco is able to fend off the lawsuit and continue selling the products, it could pose a serious threat to Lululemon’s growth at a time when it’s already struggling to grow sales at a high rate. Consumers have been cutting back on discretionary expenditures and if Lululemon has to also compete against Costco and its low prices, that could exacerbate its current woes.

Many Lululemon pants frequently retail at more than $100, and if consumers can buy similar products at their local Costco, that could hurt the company’s pricing power, possibly forcing it to reduce prices, which would hurt its gross margins and impact its overall level of profitability.

Lululemon’s growth rate has been falling sharply in recent years

In recent quarters, Lululemon has been growing its sales by just single digits, which is down significantly from how well the business did in previous years — when it wasn’t uncommon for its growth rate to be in excess of 20%.

LULU Revenue (Quarterly YoY Growth) data by YCharts

If you factor in the potential for Costco to provide customers with similar-looking products, that could further erode its growth rate in the future. And with tariff uncertainty still looming with respect to China, a key market for Lululemon and where it also imports many of its products from, there are multiple headwinds for investors to consider before buying the retail stock.

Why I’d avoid Lululemon stock right now

Lululemon’s intellectual property and overall competitive advantage faces a big test with its suit against Costco right now. If consumers can buy similar-looking clothing at just a fraction of the price, it could lead to even worse growth prospects for the company in future quarters. And with macroeconomic conditions not looking all that great, consumers may still be tempted to look for lower-priced alternatives. The declining growth rate does seem to suggest that demand may be constrained right now.

Although Lululemon stock may look cheap, trading at a price-to-earnings multiple of around 14, given the uncertainty the business faces in both the short and long term, this is not a company I’d invest in today. It all hinges on how much value consumers place on the brand and the willingness to pay significantly more for Lululemon products. Right now, things aren’t looking too good, and unless Lululemon’s growth prospects drastically improve or it wins its suit against Costco, I’d avoid the stock.