All the attention these days has gone to businesses that are in the middle of the artificial intelligence (AI) boom. While some of these companies certainly have their merits, investors shouldn't ignore other pockets of the economy that have also been successful at compounding capital, such as the retail sector.
Costco Wholesale (COST +0.00%) is a prime example. The dominant warehouse club's shares have produced a total return of 548% in the past decade, driven by strong financial performance. However, this retail stock is down 18% from its peak (as of Dec. 10).
Is Costco a long-term buy right now?
Image source: Getty Images.
Costco's bull case is clear
When it comes to finding long-term investment opportunities, the first filter is figuring out whether the company in question is even deserving of your capital. There are some key factors that demonstrate Costco undoubtedly falls into this category.
It has a stellar history of consistent growth in same-store sales (comps). In fiscal 2025, comps rose by 5.9%, following a 5.3% gain in fiscal 2024. Even in fiscal 2020, a year that saw the pandemic ravage the global economy, Costco's comps climbed 7.7%. A combination of more foot traffic and higher average transaction sizes keeps things moving, supported by the fact that the chain benefits from tremendous customer loyalty.
That loyalty isn't surprising, since it relentlessly focuses on selling high-quality merchandise at the lowest prices. The company collected $270 billion in fiscal 2025 net sales, making it the world's third-biggest retailer, after Walmart and Amazon.
But Costco is unique in that it only sells about 4,000 stock-keeping units per location, substantially lower than the 30,000 items a typical supermarket sells. This gives the business enormous negotiating power with its suppliers, helping it keep costs in check. Those savings are transferred to shoppers.
And by running a membership business model, Costco also incentivizes customers to visit its warehouses frequently. These memberships bring in a recurring and high-margin revenue stream, totaling $5.3 billion in fiscal 2025, up 10% year over year. The members' renewal rate usually hovers around 90%. And the company has proven pricing power, as it just raised the annual fees for its memberships last year.
NASDAQ: COST
Key Data Points
Despite its sheer size, Costco continues to have growth potential. Management opened 24 net new warehouses in fiscal 2025, with the bulk of them coming in the U.S. In its most important market, there is room to expand. But international markets also present a significant opportunity.
Expanding the store footprint, bringing on new members, and growing comps have supported Costco's net income, which has increased at a compound annual rate of 12.9% between fiscal 2015 and fiscal 2025.
Shining the spotlight on Costco's steep valuation
Costco's steady financial gains in the face of various challenges in the past few years -- like the pandemic, supply chain disruptions, rising inflation and interest rates, and general macro uncertainty -- are a clear indication of how great a business it really is. Investors definitely value that kind of predictable performance, particularly when compared against companies that experience more volatility with their financials.
Most market observers would agree that Costco should at least be considered as a possible addition to a long-term investor's portfolio. The stock's track record at compounding capital speaks for itself. Its total return in the past three decades of 15,680% absolutely trounces the S&P 500's 1,820% total return.
But right now, it's smart to be cautious. Costco is a top-notch company, and the valuation reflects this reality, even though shares are well off their peak. Investors must be willing to pay a price-to-earnings ratio of 48.1 to buy the stock. The best thing to do is wait for a better entry point. However, those who want to take advantage of the dip can consider dollar-cost averaging into a full position over 6 to 12 months, for instance.
