Costco (COST) Last Update 9/21/21
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TREFIS Analysis

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Costco Company


  1. Core Merchandise US constitutes 48% of the Trefis price estimate for Costco's stock.
  2. Core Merchandise International constitutes 21% of the Trefis price estimate for Costco's stock.
  3. Ancillary Business constitute 15% of the Trefis price estimate for Costco's stock.


  1. Costco's Stellar Q3 Performance
Costco's comparable sales accelerated to 20%, the fastest pace since at least the first quarter of FY 2017. E-commerce comparable sales rose 41.2% compared to the year-ago quarter. Net sales increased by 21.7% from last year, which is better than the 17.5% increase that analysts on Wall Street were expecting. Similarly, Costco reported earnings per share of $2.75, a 45% increase from last year and better than the $2.32 expected by Wall Street.

At the end of the third quarter, Costco had 60.6 million paying households. That was an increase of 900,000 from the previous quarter. Moreover, as a sign of how much its customers appreciate the privilege, Costco's membership retention rate in the most recent quarter was 90%.

  1. Increase in Wages
Costco made permanent the temporary wage increase it implemented during the pandemic. The company began a temporary $2 per hour wage increase at the pandemic's onset to ensure its employees would show up to work. But now, the permanent wage increase will be changed to $1 per hour instead of the $2 per hour Costco had been paying until the third quarter.


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 $979 in 2016 to $1,220 in 2020. 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 $1,530 by the end of the forecast period. Increasing new membership signups and higher penetration of executive membership is expected to drive Revenue per Square Foot for Costco US. If Revenue per Square Foot for Costco U.S. increases to $1,700 driven by growing membership, there could be about 5% upside to our price estimate. On the other hand, if the growth is limited to $1350, there could be about 5% downside to our price estimate for Costco.

  • Number of Costco U.S. Warehouse Clubs: Costco has been steadily expanding in the US by opening more stores. The figure has increased from about 468 at the end of 2014 to 552 at the end of 2020. Trefis expects the store count to continue to rise and reach 615 in the long term. In case, the number of Costco U.S. Warehouse Clubs reaches 690 by the end of the forecast period, there could be 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 550 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.


Costco is the second-largest retailer in the U.S. and the largest in the warehouse club category with revenues of $167 billion at the end of fiscal 2020. 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 the end of fiscal 2020, the company operated about 795 warehouses globally; including 552 in the U.S., 101 in Canada, 39 in Mexico, 29 in the U.K., 27 in Japan, 13 in Taiwan, 16 in Korea, 12 in Australia, 3 in Spain, and 1 each in Iceland, France, and China. It has approximately 105,500 members including 46,800 gold star members. 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.

Costco's membership fee increased with effect from June 1, 2017. The company hiked the price of its Gold Star membership by $5 per year to $60 and raised its Executive membership fee to $120 from $110. In addition, the company reported that the maximum annual 2% reward associated with the Executive membership will increase from $750 to $1,000. Prior to this increase, the retailer last increased its membership fee in November 2011.

In 2020, Costco continued to add members, while maintaining a renewal rate of around 91%. This is significant because Costco relies heavily on its membership fees, despite the fact that these fees account for only 2% of the company's total revenues. The company's membership fees contribute around 16% of the company's value, per Trefis estimates, given the low costs associated with this revenue stream.


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

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 552 warehouse clubs in the U.S. versus 243 warehouse clubs internationally as of the end of 2020. These warehouses contributed more than 27% of Costco's total merchandise sales.

Increasing penetration of executive members

Executive members pay $120 as a membership fee (as opposed to $60 paid by the other members) to get 2% (maximum of $1000) 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 38% in 2009 to close to 44% in FY 2020.

International markets present a huge opportunity

Costco has recently expanded in Iceland, France, and China. 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 56 stores in Taiwan, Korea, and Japan combined and 12 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 Wal-Mart have expressed interest in these markets and are exploring various opportunities to grab the 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 6% ( as of fiscal 2020) 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.

Keen to foray into other lucrative areas

Costco is strategically trying to enter other market segments by partnering with strong existing players in the industry. In April 2012, Costco launched a mortgage program in partnership with First Choice Bank and 10 other lenders. It intends to leverage its customer base and wider presence to market this program., Costco's mortgage lending site, gathers rates from different lenders and provides a summary of competitive quotes to its customers. In return, it gets paid for marketing this service to its customers.

It has also partnered with Aetna, one of the world's largest managed health care services company, to offer health insurance services. The Costco Personal Health Insurance program offers five Aetna health plans with major medical benefits and dental coverage. This partnership would likely benefit from several synergies associated with Costco's affluent customer profile and Aetna's expertise in the health insurance industry.


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 US 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 30% of Costco’s merchandise at the end of 2018.

Competition intensifying in the retail industry

The retail business has become highly competitive. Costco competes with over 800 warehouse club locations across the U.S. and Canada. It faces stiff competition from Wal-Mart, Target, Kohl's, and Amazon in the general merchandise retail segment.

With the onset of online retailers like Amazon and eBay, the competition has led to competitive pricing which in turn, has led to a fall in prices and gross margins consequently.