Costco's Q1 FY2025 Filing: The Membership Model Powers On

Costco's quarterly SEC filing for Q1 FY2025 (ended November 24, 2024) reveals a retail operation firing on all cylinders. While competitors struggle with traffic and margin pressure, Costco's unique membership-based model continues delivering consistent growth.

Quarterly Financial Highlights

The 10-Q presents strong headline numbers:

**Net Sales**: $60.99 billion (up 7.5% year-over-year)
**Membership Fees**: $1.17 billion (up 7.8%)
**Operating Income**: $1.98 billion (3.2% margin)
**Net Income**: $1.80 billion
**Comparable Sales**: +5.2% (US), +5.8% (Total Company)

The membership fee line deserves special attention. At nearly 100% gross margin, membership revenue flows almost entirely to the bottom line—and it grew faster than merchandise sales.

Understanding Costco's Business Model

Costco operates differently from traditional retailers. The membership model creates unique economics:

**Membership Revenue**

134.5 million cardholders worldwide
Renewal rates: 92.9% (US/Canada), 90.4% (worldwide)
Recent fee increase ($5 for Gold Star, $10 for Executive) fully implemented
Revenue recognized ratably over 12-month membership period

**Merchandise Strategy**

Average markup: 11% on branded goods, 15% on Kirkland Signature
Gross margin intentionally capped at ~10.5%
Low prices drive traffic; membership fees generate profit
Limited selection (3,800 SKUs vs. 30,000+ at competitors)

This model creates a virtuous cycle: low prices drive membership, membership fees fund operations, consistent experience drives renewals.

Comparable Sales Breakdown

The filing provides detailed comparable sales analysis:

**United States**

Comparable sales: +5.2%
Traffic (transactions): +4.3%
Ticket (average basket): +0.9%
E-commerce: +13.2%

**Canada**

Comparable sales: +5.1%
Similar traffic-driven growth pattern

**International**

Comparable sales: +7.5%
Strength in Mexico and UK markets

The traffic growth is notable. While many retailers see declining visits offset by higher average tickets (inflation-driven), Costco is growing both metrics. More members are shopping more frequently.

Category Performance

Revenue by category from the filing:

**Foods and Sundries**: $21.3 billion (35% of sales)
**Hardlines**: $9.2 billion (15%)
**Fresh Foods**: $8.8 billion (14%)
**Softlines**: $7.0 billion (11%)
**Ancillary and Other**: $14.7 billion (24%)

Ancillary revenue—gasoline, pharmacy, optical, food court, and travel—continues growing faster than core merchandise. Gasoline alone represents significant traffic driver, with prices typically below competitors.

Membership Fee Economics

The membership fee increase implemented in September 2024 is now fully reflected in results:

Gold Star: $65 annually (was $60)
Executive: $130 annually (was $120)
Executive members represent ~46% of paid members but ~73% of sales

The filing notes minimal membership churn from the price increase. With renewal rates above 90%, Costco demonstrates significant pricing power. A $5 increase across 50+ million memberships generates $250+ million in high-margin revenue.

Expansion and Capital Investment

Costco's growth strategy focuses on new warehouse openings:

**Warehouses opened Q1**: 7 new locations
**Total warehouses**: 897 worldwide (617 US, 280 international)
**Pipeline**: 23 locations under construction
**Capital expenditure guidance**: $4.5-5.0 billion annually

Each new warehouse generates approximately $200 million in annual sales at maturity. With payback periods under three years, Costco's disciplined expansion creates steady, profitable growth.

Margin Analysis

Costco's intentionally low margins distinguish it from competitors:

**Gross Margin**: 10.48% (up 5 basis points)
**SG&A Ratio**: 9.53% (up 8 basis points)
**Operating Margin**: 3.23%

For context, Walmart operates at 24% gross margin; Target at 28%. Costco's low margin isn't a weakness—it's the strategy. By taking minimal margin on merchandise and relying on membership fees for profit, Costco creates a value proposition competitors struggle to match.

The filing notes wage investments continue, with Costco's starting wage significantly above retail average. This investment shows in employee retention and customer service quality.

E-Commerce Growth

Digital revenue grew 13.2%, though it represents a small percentage of total sales. Key digital initiatives:

**Same-day delivery**: Partnership with Instacart expanding
**Costco Logistics**: Furniture and large item delivery capability
**Membership digital enrollment**: Growing share of new signups
**App engagement**: Increasing digital circular usage

Costco's e-commerce approach is pragmatic: enhance the membership value rather than chase pure-play competitors on convenience.

Balance Sheet Strength

The filing confirms Costco's fortress balance sheet:

**Cash and equivalents**: $13.8 billion
**Merchandise inventories**: $19.6 billion
**Total debt**: $7.5 billion
**Shareholders' equity**: $23.4 billion

With debt-to-equity of 0.32x and substantial cash, Costco has flexibility for expansion, special dividends, and opportunistic investments.

Visualizing Costco's Profit Flow

A Sankey diagram of Costco's income statement reveals the unique business model visually. The narrow gross profit stream (reflecting minimal markup) is supplemented by high-margin membership fee revenue. These streams merge before flowing through operating expenses to net income.

The visualization makes immediately clear why membership renewal rates matter so much: that revenue stream, though smaller than merchandise sales, contributes disproportionately to profits.

Investment Implications

Costco's Q1 filing reinforces the investment thesis:

**Strengths**

Traffic growth demonstrates value proposition resonance
Membership fee increase absorbed without churn
International expansion providing growth runway
Balance sheet supports continued investment

**Risks to Monitor**

Wage inflation pressure on SG&A
Consumer discretionary spending sensitivity
E-commerce competitive dynamics
Warehouse real estate availability

For long-term investors, Costco's SEC filings consistently demonstrate the durability of the membership model. In a retail environment full of disruption, Costco's value proposition and operational execution stand out. The quarterly 10-Q confirms the model continues working as designed.

Costco Q1 FY2025 Earnings Analysis: Membership Fees and Same-Store Sales Momentum