In a lot of ways, Costco is the textbook picture-perfect business. Its customers are fiercely loyal. It has always maintained a laser focus on its strategic vision, growing slowly and intentionally. New store openings, increased volume per store, and measured increases in membership pricing are hallmarks of the company’s success. But there some are warning signs for investors.
1. Inflation Resistance
Value is baked into the Costco brand. The company’s hot dog and soda price hasn’t changed at all in 40 years. It’s still $1.50. Its membership fee just rose from $60 to $65 per year—the first increase since 2017. The cost of an executive membership went up from $120 to $130 annually—but executive members receive an annual rewards certificate of 2%, and the maximum rewards also increased from $1000 to $1250 per year.
While all of this is great news for consumers, it’s not so good for investors. Costco is extremely resistant to keeping up with inflation. This makes it harder and harder to provide strong returns.
2. Sketchy Margins
A large part of Costco’s dedication to value is a commitment to keeping its margins extremely low. The company offers a vast array of merchandise, from groceries to tires, as well as services such as eye exam. But its average margin per product is less than 2%. There simply isn’t a lot of room to make money beyond the upfront membership fees.
3. Their Indicators Are Dangerous
Costco is extremely successful, whether because of or in spite of their laser focus on value. But there simply isn’t a lot of room for more than slow to moderate growth. It’s already priced as a premium company, with a stunning 52.6 price-to-earnings (P/E) ratio. This valuation may be completely fair, but it’s simply too expensive to consider buying in at this point.
Neither Lisa Fritscher nor Stocks.News have positions in this company.
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Contributing Writer
Lisa Fritscher has been a contributing writer for App.Stock.News since 2024. Lisa has been interested in investing since winning The Stock Market Game in high school. In more than a decade as a professional writer, she has written consumer-facing financial information and advice articles for a wide variety of publications. She has a Bachelor of Arts in Psychology from the University of South Flori...