3 Things to Know About Costco Wholesale Stock Before You Buy

Key Points

• Costco's membership fees generate over 65% of the company's bottom-line profits, making it more of a subscription service than a traditional thin-margin retailer.

• The Kirkland Signature brand alone generates more than $75 billion in annual sales, larger than many Fortune 500 companies.

• Costco's virtuous cycle -- more members enable better prices, which attract more members -- is nearly impossible for competitors to copy.

• 10 stocks we like better than Costco Wholesale ›

I could tell you that Costco Wholesale (NASDAQ: COST) is a great company -- but you probably already know that if you've ever stumbled out of the local warehouse with a 48-pack of paper towels and enough single-serve coffee pods to last through the apocalypse. And then you had a Kirkland Signature hot dog combo for $1.50.

What you might not know is exactly what makes this bulk-buying behemoth such a compelling investment. So, before you add Costco to your Wall Street shopping cart today, here are three things that explain why this warehouse retailer is more like a subscription service in disguise -- and why that matters for your returns.

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Did I really buy 3 gallons of Nutella? It only happens at Costco. Image source: Getty Images.

1. Membership fees are the profit engine

Costco's membership fees (currently $65 to $130 annually) represent nearly all of the company's net profits.

I'm not kidding. The company really does revolve around the annual fees.

Costco operates on razor-thin gross margins (around 11%) intentionally to provide value to members. Low prices generate a ton of foot traffic in the store, as I'm sure you know if you've ever set foot in a Costco warehouse. In Q3 2025, membership fees totaled $1.24 billion, while net income was $1.90 billion -- meaning membership fees alone account for more than 65% of bottom-line profits. It's not quite that simple, as Costco pays tax on the fee-based profits. Still, the costs of running the membership program are minimal, so this revenue stream is pretty much pure profit.

The tally of 137 million Costco members (as of Q4 2024, almost a year ago -- almost certainly more by now) is comparable to telecom giant T-Mobile US (NASDAQ: TMUS) and its 133 million customers, or the 128 million subscribers in Walt Disney's (NYSE: DIS) Disney+ service. It's also about twice the size of arch rival Walmart's (NYSE: WMT) Sam's Club membership list.

This strategy creates a predictable, recurring revenue stream that's less dependent on unpredictable retail sales. That's not where Costco's profits come from.

2. Kirkland Signature is a hidden gem

The private label Kirkland Signature brand generates an estimated $75 billion in annual sales (roughly 25% of Costco's total revenue), making it larger than many Fortune 500 companies on its own. These products typically offer at least 20% better value than name brands while maintaining high quality standards.

Costco's management has been known to keep Kirkland out of promising product categories like gasoline and disposable razor blades for years, just because Costco couldn't guarantee a top-of-the-line product in these areas. These days, Costco's gas pumps account for about 16% of total sales but there still aren't any Kirkland razors. Costco tried its hand at Kirkland razors in 2018, but also discontinued that underwhelming product a couple of years later.

The company has the nerve to pursue a great idea even if it's hard, but is also wise enough to back out when existing options are too difficult to beat.

This consistent combo of low price and high quality creates strong customer loyalty and higher margins for Costco compared to selling someone else's branded products. I mean, Costco does plenty of that as well -- the store simply wouldn't be the same without Kirkland products.

3. Costco's distinct business model creates a powerful moat

Costco's bulk-buying model creates a virtuous cycle. More members give the company stronger buying power, which leads to lower prices -- and now I'm back to attracting more members. The virtuous cycle takes another full turn.

With 137 million cardholders worldwide (at the end of fiscal year 2024 -- probably more now!) and 93% renewal rates in the U.S. and Canada, the company has incredibly sticky customers. The warehouse format and limited number of specific products (about 4,000 items vs. 30,000+ at typical big-box retailers) also make it extremely difficult for competitors to replicate.

Wrap all of that in the warm hugs of Kirkland products and predictable membership fees, and you get a world-class member magnet.

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Anders Bylund has positions in T-Mobile US, Walmart, and Walt Disney. The Motley Fool has positions in and recommends Costco Wholesale, Walmart, and Walt Disney. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.