Costco (COST +1.12%) has been a monster market winner. The shares' trailing 10-year total return of 691% (as of March 5) trounces that of the S&P 500 index.
After learning about this kind of remarkable performance, it's understandable if investors want to hop on the bandwagon for the sake of their portfolios. Take a minute to pause, however. Here are three things to know about this retail stock before you buy.
Image source: The Motley Fool.
1. Costco is not a typical retail operation
Costco's business model rests on its ability to sell merchandise in a wide range of categories, including groceries, electronics, apparel, and furniture, at very low prices. On the surface, this doesn't really stand out. After all, the world of retail is incredibly cutthroat. And businesses must separate from the pack if they want to win customers over.
Investors might be surprised to learn that Costco's main objective isn't to make as much money as possible from its merchandise. In fact, the typical markup on its goods is 11%. That's much lower than the markup at other big-box retailers. Instead, the goal is to push more volume.
"We will never succumb to not being the best price and driving prices down for our members," CEO Ron Vachris said on the Q1 2026 earnings call. "That's what Costco is known for. That will always be our leading mantra."
Those low prices and that low gross margin are a feature. And they are intentional. They support the true profit generator, which are the memberships. Costco believes so much in the value proposition it offers that it layers a membership model on top. Households must pay $65 annually for the basic membership (or $130 for the executive option that comes with added perks) to be able to shop in the warehouses.
This strategy supports loyalty and frequent visits. And it brings in a high-margin and recurring revenue stream that totaled $1.4 billion in Q2 2026 (ended Feb. 15).
2. Scale is the most important attribute
During the latest fiscal quarter, Costco collected net sales of $68.2 billion. This puts it behind only Walmart and Amazon. Costco is unique from competitors, however, since its warehouses carry 4,000 stock-keeping units on average. That's much less than the 30,000 at a typical supermarket.
Consequently, there is a high dollar value on the limited kinds of items that Costco orders from its vendors. This gives it incredible negotiating leverage. And these suppliers don't want to ruffle any feathers, or they'll miss out on the massive potential revenue from being able to sell their goods at Costco stores.
The scale is what keeps the flywheel going. Low prices on the shelves incentivize more shopping from customers, supporting higher revenue for Costco. This leads to bargaining power, which keeps costs down. And shoppers benefit. This powerful setup reinforces the company's durability, making it a blue chip stock.
NASDAQ: COST
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3. The stock doesn't fit the company's DNA
Costco's strategy might be to offer its customers extremely low prices. The stock, however, operates with a different scheme. It trades at a premium valuation. Investors can buy shares if they're comfortable paying a price-to-earnings (P/E) ratio of 52.6. In the past five years, the cheapest they've sold for was a P/E multiple of 31.9, which was in March 2021.
Costco's diluted earnings per share have climbed by 16.4% in the past five years. It's reasonable to believe that Costco's current valuation is far from justified. There are plenty of examples of companies out there with faster profit gains, particularly in the tech sector.
But it's clear that the market probably values Costco based on its stability and predictability. The view might be that this is a safe stock to add to the portfolio.
