5 Reasons Costco Stock Deserves a High Valuation

Key Points

• Membership renewal rates above 90% and rising fee income keep Costco's results unusually predictable.

• Traffic, comps, and e-commerce trends remain solid as the retailer leans on scale and the Kirkland brand to hold the line on price.

• A price-to-earnings multiple in the low-50s might not be as bananas as it sounds.

• 10 stocks we like better than Costco Wholesale ›

Costco Wholesale (NASDAQ: COST) shares have been on a strong multiyear run, but have pulled back slightly recently, making it a good time to take a look at the stock.

Investors will get to see the retailer's fiscal fourth-quarter results tomorrow. The company already reported net sales growth for the period of 8%, previewing what's likely to be another strong quarter for the wholesale retailer. The warehouse club specialist's model -- members paying annual fees for access to low prices and high volumes -- keeps momentum steady even when the consumer is choosy. The question worth pondering ahead of the report is how much of that strength should be reflected in today's price.

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1. Membership model power

Membership is arguably one of the main reasons the stock commands a high valuation. In the third quarter of fiscal 2025 (ended May 11), membership fee income rose 10.4% to $1.24 billion, while paid households reached 79.6 million. Renewal rates stayed exceptional -- 92.7% in the U.S. and Canada and 90.2% worldwide -- and executive members accounted for 73% of sales. Additionally, management has noted the accounting timing of last year's fee increase means the largest benefit will flow through the back half of fiscal 2025 and into early fiscal 2026.

2. Steady traffic and comps

Core retail momentum remains healthy. For the third quarter, adjusted comparable sales (often referred to as comps or same-store sales) increased 8%, with traffic up 5.2% and e-commerce up 14.8%. Meanwhile, Costco's August sales results set the tone for Q4: For the 16-week period ended Aug. 31, comps rose mid-single digits, with the U.S. up 5.1% and "other international" up 8.6%. That's consistent, broad-based growth in a cautious spending environment.

3. Price leadership at scale

Costco's premium also rests on its ability to hold the line on price and thus keep customers. On the latest call, CEO Ron Vachris said the team maintained its "competitive price position despite a challenging macroeconomic backdrop," highlighting how sourcing shifts and Kirkland store brand products help blunt tariff and cost pressure. Scale and a limited SKU (stock-keeping unit) count keep operating costs low, reinforcing everyday value and traffic -- a powerful business model and value proposition that does well in any economic environment.

4. Room to keep expanding

Additionally, unit growth continues to add a long runway to the company's potential. Costco ended the third quarter with 905 warehouses and outlined a path to roughly 914 locations by fiscal year-end, with international markets still under-penetrated. That footprint, combined with steady comparable sales growth, pushed Costco's trailing-52-week net sales to roughly $271 billion as of August, up from about $252 billion a year earlier.

For the full fiscal year, Costco expects to have opened 27 new stores -- a pace that can continue with the company expanding both domestically and internationally.

5. Cash returns and flexibility

Costco backs growth with a strong financial position and disciplined capital returns. Through the first 36 weeks of fiscal 2025, operating cash flow reached $9.47 billion; cash and equivalents stood at $13.84 billion at quarter-end. Further, the board raised the quarterly dividend 12% in April to $1.30 per share. Occasional special dividends over time add another lever, even as reinvestment stays the priority.

That brings us to valuation. As of this writing, shares trade around $943, equating to between 53 and 54 times earnings and a dividend yield around 0.6%. For a retailer with comps in the mid-single digits, that's a rich price-to-earnings multiple that assumes continued steady execution and little margin for disappointment. These strengths -- recurring fee income, consistent traffic, price leadership, unit expansion, and healthy cash generation -- justify a high premium. At today's levels, though, the premium looks close to the edge of what the growth can carry.

A pullback or evidence of accelerating earnings could improve the risk-reward scenario, but absent that, patience is likely a great strategy. Given enough time, a great business like Costco can easily make a stretched valuation look normal again as it delivers consistent growth and grows into its valuation.

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Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.