With third quarter of 2025 (ended May 11) net sales of $62 billion, Costco (COST 2.35%) is a business that hardly flies under the radar. This is a dominant retailer that has done a wonderful job taking care of its investors historically. In the past 20 years, shares have generated a total return of 3,060% (as of Aug. 4) -- an unbelievable gain.
Costco's early shareholders who held on to their shares have certainly gotten wealthy. Investors who are interested in the company today must have a fresh perspective, though, and view the current situation with clear eyes. Could buying this top retail stock today set you up for life?
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Costco is a high-quality business
I believe that every investor should at least have Costco on their watch list because it's a great company. Here are some key reasons why.
For starters, Costco has a wide economic moat that stems from its cost advantage. The company's warehouses carry about 4,000 stock-keeping units, much less than the tens of thousands that a typical supermarket sells. But Costco is the world's third largest retailer. Therefore, it's selling a massive quantity of a limited number of goods.
This gives the company tremendous buying power over its suppliers, which results in favorable costs. Consumers benefit the most, as they can shop for quality merchandise at low prices. More revenue will further bolster Costco's cost advantage in a positive feedback loop.
If Costco operated with a simple business model of selling goods at the lowest prices around, it wouldn't necessarily be unique in the retail industry. But the company runs a membership program, so only those households that pay an annual fee are allowed to shop at its warehouses. As of May 11, there were 79.6 million membership households with a 90.2% worldwide renewal rate. This drives customer loyalty.
Compared to other big-box retailers, Costco marks up the price of its inventory at a much lower rate. However, it's able to do this because it makes money from memberships. In Q3, membership income totaled more than $1.2 billion, up 10.4% year over year. This is surely a high-margin revenue source.
Costco's staying power
Durability is another reason this is a high-quality company. These days, technology is a disruptive force that's basically hitting all industries in some way, and the retail sector hasn't been spared. Just look at the rise of online shopping, which today commands about 16.2% of the entire U.S. retail market. Just 10 years ago, this share was 6.9%.
Of course, Amazon deserves credit for propelling this trend. It has definitely won over consumers, thanks to its popular Prime membership program. However, Costco has still been very successful, as its consistent revenue and earnings growth demonstrate.
Shoppers still love the in-person experience. This gives me confidence that Costco will still be relevant decades from now.
Expectations have outpaced reality
It's quite shocking to see a retailer put up such phenomenal investment gains that has continued in recent times. Just in the past five years, Costco shares have produced a total return of 214%. This figure is supported by not only regular dividends, but special one-time payouts.
The stock has done well, but I believe the valuation has gotten stretched. It trades at a price-to-earnings ratio of 54.2. Investors have bid up the shares to the point where expectations have outpaced reality.
The valuation implies rapid profit growth in the years ahead. That's not going to happen, as this is a mature company.
To be fair, Costco continues to open new warehouses, which will certainly lead to revenue and earnings gains. However, I wouldn't be surprised if the stock lags the overall market over the next decade. Buying Costco shares today won't set you up for life.
