Few retail stocks are as popular as Costco Wholesale (COST 0.34%) these days. The membership-based warehouse retailer has put up strong growth numbers during the worst of the pandemic and in the recovery over the last year. It's fended off a challenge from Amazon, it's proven it can grow through both the e-commerce channels and through its stores, and it continues to open new locations.

While Costco has held up better than most of its retail peers over the last year, the shares are still down 20% from their peak this spring. Is Costco a buy at the current price, or is it still too expensive at a price-to-earnings ratio of 37? Let's take a closer look at what the stock has to offer today.

Cars parked outside of a Costco.

Image source: Costco.

A straightforward business model

Costco has become the second-biggest brick-and-mortar retailer in the U.S. by offering quality merchandise in bulk at rock-bottom prices, using its Kirkland private label to deliver value for its customers. The business's gross margins are thin and it operates its retail business near cost, making most of its profits on membership fees.

In the most recent quarter, the company brought in $1 billion in membership fees and $1.36 billion in net income, meaning membership fees made up 74% of profits. Satisfying members, therefore, is key to Costco's success, and the company has a strong track record in customer satisfaction. In its fiscal first quarter, which just ended, the company said that renewal rates were 92.5% in North America and 90.4% globally.

It also continues to grow its membership base, with total paying household memberships up 7% to 66.9 million. Executive members, who pay double the fee of regular members, reached 30 million, making up 45% of its total membership base.

Costco also hinted on the earnings call that a membership fee increase was coming, which would help pad its margins. Typically the company raises prices by $5 on ordinary members and $10 on executive members, which would put membership prices at $65 and $130. It also tends to raise fees every five years, and its last increase came in 2017, making it due for another one. 

However, Costco has shown some signs of vulnerability lately. In its November sales report, constant-currency comparable sales, excluding fuel prices, rose just 5.3%, and e-commerce sales declined 8.9%, showing its growth is decelerating.

While Costco benefits from selling mostly consumer staples, which are more resistant to recessionary headwinds and inflation, the company seems to be exposed to the same consumer softness that other retailers have complained about. It's also facing difficult comparisons with its performance a year ago. 

At the same time that revenue growth is slowing, the company is also seeing some margin compression. Operating income increased just 3.4% in the recent quarter, compared to 8.1% revenue growth, showing that Costco is also facing headwinds from inflationary pressure.

Is the stock a buy?

Costco is a great company, and the business model has been highly effective over the years. However, the stock is facing a number of headwinds at the moment. They include difficult comparisons with its performance a year ago, high inflation, and the potential of a recession next year, which would likely affect Costco's discretionary categories -- like electronics, apparel, and jewelry, among others.

At a price-to-earnings ratio near 40, the stock is also expensive, especially for a low-margin, brick-and-mortar retailer. Investors have found safety in consumer staples retailers like Costco and Walmart, but the high valuations make the stock vulnerable in a recession, and also mean that it's likely to underperform in a recovery as investors will rotate into growth stocks.

Given its pricey valuation and the headwinds facing the company, investors are better off waiting for a more appealing entry point.