Costco (COST 0.42%) did it again in the fiscal third quarter of 2025. It posted yet another good earnings result. Management has proven, time and time again, that the business plan behind Costco is differentiated in a very good way. But is that enough to make Costco's stock worth buying? Here's a look at some important considerations for those who want to buy Costco now.
What does Costco do?
Costco is a retailer, but its store format is very specific. It operates warehouse club stores. A warehouse store saves on expenses because the store is also the warehouse for the goods.
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The "club" part is even more important. Essentially, customers pay an annual fee for the privilege of shopping at Costco. Those fees drop right down to the operating income line. In the fiscal third quarter of 2025, Costco generated product sales of roughly $62 billion and membership fee revenue of around $1.2 billion.
Cost of goods sold was around $55 billion. General and administrative costs came to roughly $5.6 billion. Bring together all the puts and takes, and operating income was about $2.5 billion. Membership fees made up roughly half of that figure, which is fairly normal and gives Costco a lot of leeway with its prices.
Costco can afford to accept lower margins on the goods it sells because of those membership fees. That, in turn, allows it to keep customers happy (and renewing their annual memberships) because they appreciate low prices. It is a win/win relationship.
Is Costco worth buying?
With that backdrop, it shouldn't be too shocking to find out that Costco was able to increase same-store sales by a very impressive 5.7% in the just-reported quarter. Overall sales, helped along by new store openings, rose an even larger 8%. Traffic in the company's stores rose 5.4%, with a slight uptick in the amount paid per visit. Online sales also ratcheted higher, growing roughly 15% year over year in the quarter.
This was a very strong showing. As a business, Costco is highly desirable. But as a stock, it might not be. Note that the shares are up around 25% over the past year, which is more than twice the gain of the S&P 500 over the same span. Investors are clearly aware of how well Costco is performing as a business. This hints at the problem.
When you examine traditional valuation metrics, the reason to hold off on a Costco investment becomes abundantly clear. The stock's price-to-sales, price-to-earnings, and price-to-book value ratios are all above their five-year averages. In fact, the P/E ratio, probably the most common valuation tool, is near the highest levels in Costco's recent history.
You should probably take a pass on Costco
There's no question that Costco is a well-run business. Its strong financial results prove that out. But investors are aware of that and appear to have priced the stock for perfection. To paraphrase Benjamin Graham, even a great company can be a bad investment if you pay too much for the stock. That looks like the situation today with Costco.
