Costco Wholesale Corp

Costco's record passes the quality tests, but the price sits above the engine's base-case value.

Costco runs membership warehouses and e-commerce sites, and it earns most of its profit from high sales volumes and fast stock turns, with membership fees adding a recurring income base. Across 15 years of filings it has no loss years, return on equity has averaged 28%, and free cash flow of $9.4B in the latest year shows that reported profit is backed by cash. On valuation the picture is different: at $989.11 the share price is 48× earnings and 12× book value, against a base-case value of $535.41 and a bull case of $840.82. The engine's verdict is demanding price, and the quality of the business does not change that verdict on its own.

Costco runs membership warehouses and e-commerce sites that sell a limited range of branded and private-label goods at low prices. Members pay an annual fee, which is a steady income stream on top of a thin margin on goods. Profit comes mostly from high sales volumes and fast stock turns, with gasoline, pharmacy and other ancillary sales adding traffic.

• Membership fees, paid annually and renewed by members
• Comparable warehouse sales, driven by shopping frequency and average ticket
• Executive membership upgrades and the spending they bring
• Kirkland Signature private-label goods, which carry higher margins
• New warehouses, with growth increasingly outside the United States

Inside the circle? Operating margin has stayed in a narrow band across 15 years of filings, with no loss years, and membership fees add a recurring base. The main uncertainty is the price, not the business: at $989.11 against a base-case value of $535.41, the stock sits well above the engine's estimate. Technology change, AI-driven price comparison and regulation could still shift the economics over ten years, and the excerpts do not show how management would handle those shifts.

The filing points to three sources of protection: low prices built on volume buying and fast stock turns, a paid membership that members renew, and a brand that shoppers trust. The low-margin model depends on scale, which a smaller rival would find hard to copy, and the membership fee adds a recurring income base. The financial record fits this picture: gross margin has averaged 11%, operating margin has averaged 3.4% with a volatility of 0.3%, and return on invested capital has averaged 34% with a low of 24%. Pricing power is only partly shown, because management says it does not focus on maximising prices, and the excerpts do not show what happens to membership when prices rise. The excerpts also do not cover how the moat would hold if rivals cut prices hard for several years, so that part of the question is open.

Management reinvests most of its cash in new warehouses and pays a rising dividend. Owner earnings (reported profit plus depreciation, less the capital spending needed to keep the business competitive) have been strong, with the engine showing $9.0B for the latest year. Capital spending runs at 2.1× depreciation, so growth consumes cash, which is the main cost of the model. Buybacks are small: the share count has moved by 0.1% a year, and the remaining authorisation is still large. The stock is priced at $989.11 against a base-case value of $535.41, so a buyer today would pay well above the engine's estimate, and the filing itself says the price already reflects high expectations. The excerpts do not show how management would redeploy cash if growth slowed, so that part of the record is untested.

• Capital spending is planned to rise, and the filing says the company plans to open up to thirty-three new warehouses in 2027.
• Buybacks were modest in 2026 and 2025, and the Board still had a remaining balance under its authorisation at the end of 2026.
• The Board raised the quarterly cash dividend in April 2026, and total dividends declared rose from the prior year.
• The Japan subsidiary issued three series of senior notes at fixed rates in 2026, while total debt stays small against $15.1B of net cash.

• FailsMargin of safetyFails

  At $989.11, the price is above the base-case value of $535.41 (the bear case is $319.63), so there is no margin of safety (-85%). The standard lens asks for 25%.

  Why this test
• FailsInterest rates are gravityFails

  The owner-earnings yield is 1.8% against a 10-year Treasury yield of 5.1%.

  Why this test

Several of Buffett's documented tests look favourable here. The consistent earning power test passes, as do the high return on equity, return on capital, little debt and owner earnings tests. The $1 retained test also passes, at 13× of market value per dollar retained. Capital intensity is only mixed: capital spending has averaged 2.1× depreciation, and that growth consumes cash, which tests the principle that a good business should not eat capital. The moat looks durable on the evidence given, built on volume buying, a paid membership and a trusted brand. Pricing power is only partly shown, because management says it does not focus on maximising prices. The two tests that fail are both about price. The margin of safety test fails, with a base-case margin of safety of -85%. The interest rate test also fails: the owner earnings yield is 1.8%, while the ten-year Treasury yields 5.1%, so the cash return on the price is lower than a government bond. The principles set out here treat price as the test that decides whether a good business is also a sound purchase.

• Share price against the engine's value range

  The gap between price and value drives the verdict. A change on either side would change the picture.

• Comparable sales growth, and the split between average ticket and shopping frequency

  The filing says comparable sales are the most important driver of profit, so a slowdown would test the earnings record.

• Membership renewal rates in the U.S. and Canada, and worldwide

  The filing says the membership format is integral to profitability. Falling renewals would weaken the recurring fee income that the moat depends on.

• Capital spending against the plan for new warehouses in the next fiscal year

  Higher spending reduces the cash left for owners, which bears directly on the owner earnings test.

• Gross margin percentage and any change in pricing strategy

  Management says it may hold prices steady or cut them, which would lower gross margin in the near term and test the pricing power claim.

Questions the filings couldn't answer

• The excerpts do not show what happens to membership renewals if prices rise, which is the pricing power test Buffett emphasises.
• The excerpts do not show how the moat would hold if rivals cut prices hard for several years.
• The excerpts do not include full balance sheet detail or lease obligations, so the debt picture relies on the engine's measures.