Costco Wholesale Corporation (COST) is easy to misread if investors start with the wrong metric. In fiscal 2025, the company generated $269.912 billion in net sales, yet its gross margin percentage was only 11.12% (Costco Form 10-K, 2025). For most retailers, a margin profile that thin would suggest weak pricing power or a fragile earnings model. At Costco, it signals the opposite. The company intentionally keeps merchandise margins lean because the real economic engine sits above the shopping cart: paid memberships, high renewal rates, and the disproportionate spending power of Executive members.
That distinction matters because Costco itself frames the business this way. In both its FY2025 Form 10-K and its Q2 FY2026 Form 10-Q, the company says the membership format is integral to its business and profitability, and that growth in the membership base, Executive penetration, and renewal rates materially influences profitability. That is the core thesis for long-term investors. Costco is not trying to maximize margin on each item sold. It is trying to maximize member loyalty, traffic, and recurring fee income, then use that model to support a low-price position that rivals struggle to match.
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The real Costco thesis: why low merchandise margins do not tell the full story
A conventional retailer depends heavily on merchandise gross profit to absorb labor, occupancy, and distribution costs. Costco’s architecture is different. Membership fees provide a recurring stream of high-quality revenue that helps support the entire warehouse model, allowing the company to pass a larger share of purchasing efficiency back to members through price.
That tradeoff is visible in the numbers. FY2025 membership fees reached $5.323 billion, up from $4.828 billion in FY2024, while gross margin dollars were $30.026 billion on much larger sales volume (Costco Form 10-K, 2025). The point is not that membership fees are bigger than merchandise profit; they are not. The point is that membership fees are structurally steadier, collected upfront, and tied to customer loyalty rather than to any single product cycle or promotional window.
That gives Costco unusual flexibility. If management wants to hold pricing sharp in food, gasoline, or key traffic-driving categories, it can do so without relying entirely on item-level markup for profitability. Investors who wait for a big gross-margin expansion are likely waiting for the wrong signal. A healthy Costco usually looks like rising member counts, stable or improving renewal rates, deeper Executive penetration, and solid cash generation even while margins stay thin.
What the latest numbers show: membership fees, executive penetration, and renewal strength
The latest reported results support that framework. In Q2 FY2026, net sales rose to $68.242 billion from $62.530 billion a year earlier, while membership fees climbed to $1.355 billion from $1.193 billion (Costco earnings release exhibit, March 5, 2026). Over the first 24 weeks of FY2026, the pattern was even clearer: net sales increased to $134.220 billion from $123.515 billion, while membership fees rose to $2.684 billion from $2.359 billion (Costco Form 10-Q, Q2 FY2026).
Using those reported values, membership-fee growth in the first half of FY2026 was about 13.8%, faster than net sales growth of about 8.7%. Operating income for the same 24-week period rose to $5.069 billion from $4.512 billion, an increase of roughly 12.3% (Costco Form 10-Q, Q2 FY2026). That is exactly what investors should want to see from this model: fee income growing faster than merchandise sales and helping support operating-profit growth without any need for a dramatic change in gross margin structure.
Executive memberships are the second key layer. At the end of FY2025, Costco had 81.0 million total paid members, up from 76.2 million a year earlier. Executive members rose to 38.7 million from 35.4 million, while total cardholders increased to 145.2 million from 136.8 million (Costco Form 10-K, 2025). Executive members represented about 73.6% of worldwide net sales in FY2025, even though they were well under half of the paid-member base.
That tells investors two things. First, Executive members are the highest-value part of the ecosystem because they spend materially more. Second, the model gets stronger as the mix shifts toward them. Costco is not just adding members; it is also deepening the revenue intensity of the base.
Renewal rates remain the clearest proof of stickiness. At the end of FY2025, Costco reported renewal rates of 92.3% in the U.S. and Canada and 89.8% worldwide (Costco Form 10-K, 2025). Those are exceptionally high figures for a fee-based consumer model at Costco’s scale. They also matter more than a quarterly gross-margin move because they determine how recurring the fee stream really is.
Why the membership engine matters for cash generation and competitive durability
Membership economics show up on the balance sheet as well as the income statement. Because Costco collects annual fees upfront and recognizes them over the membership period, deferred membership fees stood at $3.126 billion at February 15, 2026, up from $2.854 billion at August 31, 2025 (Costco Form 10-Q, Q2 FY2026). That balance is not the same thing as a long-term software backlog, but it does show that cash comes in before the related revenue is fully recognized.
The operating-cash-flow picture reinforces the point. Costco generated $7.684 billion of cash from operating activities in the first 24 weeks of FY2026, up from $6.008 billion in the prior-year period, while additions to property and equipment were $2.815 billion versus $2.401 billion a year earlier (Costco Form 10-Q, Q2 FY2026). For the full FY2025, operating cash flow was $13.335 billion and capital spending was $5.498 billion (Costco Form 10-K, 2025).
Those figures matter because Costco is still expanding. The company operated 924 warehouses worldwide at February 15, 2026 (Costco Form 10-Q, Q2 FY2026). A low-margin retailer that can grow its store base, hold large cash balances, and fund capex comfortably from operations is telling investors that the business is stronger than the gross-margin line alone implies.
Cash and cash equivalents rose to $17.383 billion at midyear FY2026 from $14.161 billion at FY2025 year-end (Costco Form 10-Q, Q2 FY2026). That does not mean the model is risk-free, but it does mean membership fees help create a cash cushion that supports reinvestment and pricing flexibility. Competitors can copy a warehouse format or lower prices temporarily. What is harder to copy is a member base large enough, loyal enough, and renewal-rich enough to finance those choices year after year.
What investors should watch next: fee power, member growth, and the limits of the model
The bullish case is strong, but it is not automatic. The first variable to watch is renewal-rate stability after the September 1, 2024 membership fee increase in the U.S. and Canada. Costco said FY2025 membership-fee revenue increased 10%, driven by new member sign-ups and membership fee increases (Costco Form 10-K, 2025). If future filings show renewal rates slipping meaningfully, the market should treat that as a more important warning sign than a single quarter of merchandise-margin noise.
The second variable is Executive penetration. Executive members grew about 9.3% in FY2025, faster than total paid-member growth of about 6.3%, which is exactly the kind of mix shift investors want to see. If that upgrade cycle slows, Costco could still grow, but the most profitable and sticky part of the model would lose momentum.
The third variable is international execution. Worldwide renewal rates remain below the U.S. and Canada level, so Costco still has work to do as it expands abroad. International growth can enlarge the moat, but only if those newer markets develop the same renewal behavior and spending density as the mature North American base.
Finally, investors should remember the limit of the thesis. Membership fees strengthen the model, but they do not eliminate the need to keep prices compelling and traffic healthy. Comparable sales rose 7.4% companywide in Q2 FY2026, and digitally enabled sales increased 22.6% (Costco earnings release exhibit, March 5, 2026). If traffic weakens, the renewal engine eventually feels it. Costco’s moat still depends on delivering obvious value every time members shop.
The right conclusion is not that merchandise margins do not matter at all. It is that they matter less than many investors assume. Costco’s most revealing profit signal is the scale, retention, and spending power of its membership base. On that measure, the latest filings still point to a durable model.
Key Signals for Investors
Membership-fee growth outran net sales growth in the first half of FY2026, which suggests Costco’s recurring revenue layer is strengthening rather than merely tracking merchandise volume.
Executive members accounted for about 73.6% of FY2025 net sales, so continued growth in that tier should matter more to the thesis than small changes in gross margin percentage.
Renewal rates of 92.3% in the U.S. and Canada and 89.8% worldwide remain the clearest health check for Costco’s moat; any sustained drop would be a real warning sign.
Deferred membership fees and rising operating cash flow show the model is still producing upfront cash that can fund warehouse growth and pricing flexibility.
International markets are the next real test, because long-term upside depends on Costco exporting North American-style retention and spending behavior, not just opening more boxes.
Sources
https://www.sec.gov/Archives/edgar/data/909832/000090983225000101/cost-20250831.htm
https://www.sec.gov/Archives/edgar/data/909832/000090983226000029/cost-20260215.htm
https://www.sec.gov/Archives/edgar/data/909832/000090983226000025/costex9918-k3526.htm
All figures and management commentary cited in this article come from the primary-source documents listed above.
