# How Costco makes money

CXProWealth Business Lens · Costco (COST) · FY2026

Read from the 10-K for the period 2025-09-01 to 2026-08-30, filed 2026-10-07 with the SEC (accession 0000909832-26-000093): https://www.sec.gov/Archives/edgar/data/909832/000090983226000093/

Business Lens explains how a company earns, spends and keeps its money, from its own filings. It is insight and context, never a view on the shares, a target, or advice. Figures are raw units as filed; percentages are percentage points.

## Headline figures

- Revenue: $303.2B (+10.1% on the year)
- Operating income: $11.7B (operating margin 3.9%)
- Net income: $9.2B (net margin 3.0%)
- Gross margin: 12.8%
- Free cash flow: $9.4B (3.1% of revenue)
- Cash conversion (operating cash flow / net income): 1.71x
- Capital expenditure: 2.1% of revenue

## Where the money goes (FY2026)

- Food and Sundries → Total revenue: $116.8B
- Non-Foods → Total revenue: $77.4B
- Fresh Foods → Total revenue: $41.7B
- Warehouse ancillary and other businesses → Total revenue: $61.4B
- Membership fees → Total revenue: $5.9B
- Total revenue → Merchandise costs: $264.3B
- Total revenue → Gross profit: $38.9B
- Gross profit → Selling, general and administrative: $27.2B
- Gross profit → Operating income: $11.7B
- Operating income → Interest expense: $145.0M
- Operating income → Income before income taxes: $11.5B
- Interest income and other, net → Income before income taxes: $711.0M
- Income before income taxes → Provision for income taxes: $3.0B
- Income before income taxes → Net income: $9.2B

## Where the revenue comes from

### Products and services (Consolidated Statements Of Income)

| Member | Value | Share |
|---|---:|---:|
| Net sales | $297.2B | 98.1% |
| Membership fees | $5.9B | 1.9% |

The members sum to total revenue.

### Products and services (Segment Reporting Information by Item Category (Details))

| Member | Value | Share |
|---|---:|---:|
| Food and Sundries | $116.8B | 38.5% |
| Non-Foods | $77.4B | 25.5% |
| Warehouse ancillary and other businesses | $61.4B | 20.2% |
| Fresh Foods | $41.7B | 13.8% |

The members do not sum to total revenue.

### Segments (Segment Reporting Information by Segment (Details))

| Member | Value | Share |
|---|---:|---:|
| United States | $219.8B | 72.5% |
| Other International | $42.8B | 14.1% |
| Canada | $40.6B | 13.4% |

The members sum to total revenue.

## Income statement, as filed

| Line | FY2026 | Of revenue |
|---|---:|---:|
| Total revenue | $303.2B | 100% |
|   Net sales | $297.2B | 98.1% |
|   Membership fees | $5.9B | 1.9% |
| Merchandise costs | $264.3B | 87.2% |
| Selling, general and administrative | $27.2B | 9.0% |
| **Operating income** | $11.7B | 3.9% |
| Interest expense | ($145.0M) | 0.0% |
| Interest income and other, net | $711.0M | 0.2% |
| **Income before income taxes** | $12.3B | 4.0% |
| Provision for income taxes | $3.0B | 1.0% |
| **Net income** | $9.2B | 3.0% |
| Basic | $21 | 0.0% |
| Diluted | $21 | 0.0% |
| Basic | 443,953,000 |  |
| Diluted | 444,427,000 |  |

## History

| Period | Revenue | Operating income | Net income | Operating cash flow | Capital expenditure | Free cash flow |
|---|---:|---:|---:|---:|---:|---:|
| FY2008 | $72.5B | $2.0B | $1.3B | $2.2B | $1.6B | $607.0M |
| FY2009 | $71.4B | $1.8B | $1.1B | $2.1B | $1.3B | $842.0M |
| FY2010 | $77.9B | $2.1B | $1.3B | $2.8B | $1.1B | $1.7B |
| FY2011 | $88.9B | $2.4B | $1.5B | $3.2B | $1.3B | $1.9B |
| FY2013 | $99.1B | $2.8B | $1.7B | $3.1B | $1.5B | $1.6B |
| FY2014 | $105.2B | $3.1B | $2.0B | $3.4B | $2.1B | $1.4B |
| FY2014 | $112.6B | $3.2B | $2.1B | $4.0B | $2.0B | $2.0B |
| FY2015 | $116.2B | $3.6B | $2.4B | $4.3B | $2.4B | $1.9B |
| FY2016 | $118.7B | $3.7B | $2.4B | $3.3B | $2.6B | $643.0M |
| FY2018 | $129.0B | $4.1B | $2.7B | $6.7B | $2.5B | $4.2B |
| FY2019 | $141.6B | $4.5B | $3.1B | $5.8B | $3.0B | $2.8B |
| FY2020 | $152.7B | $4.7B | $3.7B | $6.4B | $3.0B | $3.4B |
| FY2020 | $166.8B | $5.4B | $4.0B | $8.9B | $2.8B | $6.1B |
| FY2021 | $195.9B | $6.7B | $5.0B | $9.0B | $3.6B | $5.4B |
| FY2022 | $227.0B | $7.8B | $5.8B | $7.4B | $3.9B | $3.5B |
| FY2024 | $242.3B | $8.1B | $6.3B | $11.1B | $4.3B | $6.7B |
| FY2025 | $254.5B | $9.3B | $7.4B | $11.3B | $4.7B | $6.6B |
| FY2025 | $275.2B | $10.4B | $8.1B | $13.3B | $5.5B | $7.8B |
| FY2026 | $303.2B | $11.7B | $9.2B | $15.8B | $6.4B | $9.4B |

Latest trend (the newest full year against the year before; a reading, not a forecast):

- Revenue: +10.1% (year before +8.2%): steady
- Operating income: +12.5% (year before +11.8%): steady
- Net income: +13.9% (year before +9.9%): accelerating
- Free cash flow: +19.7% (year before +18.2%): steady

## Operating figures stated in the filing

- Warehouses: 939 warehouses (as of 2026-08-30). "Costco operated 939, 914, and 890 warehouses worldwide at August 30, 2026, August 31, 2025, and September 1, 2024." (Item 1. Business)
- Warehouses: 914 warehouses (as of 2025-08-31). "Costco operated 939, 914, and 890 warehouses worldwide at August 30, 2026, August 31, 2025, and September 1, 2024." (Item 1. Business)
- Member renewal rate, U.S. and Canada: 92.3% (as of 2026-08-30). "Our member renewal rate was 92.3% in the U.S. and Canada and 89.8% worldwide at the end of 2026." (Item 1. Business)
- Member renewal rate, worldwide: 89.8% (as of 2026-08-30). "Our member renewal rate was 92.3% in the U.S. and Canada and 89.8% worldwide at the end of 2026." (Item 1. Business)
- Executive members' share of worldwide net sales: 75.2% (as of 2026-08-30). "The penetration of sales to Executive members represented approximately 75.2% of worldwide net sales in 2026." (Item 1. Business)
- Employees: 355,000 employees (as of 2026-08-30). "At the end of 2026, we employed 355,000 employees worldwide." (Item 1. Business)
- Gas stations: 774 gas stations (as of 2026-08-30). "We operated 774 gas stations at the end of 2026." (Item 1. Business)
- Net new warehouses opened: 25 warehouses (as of 2026-08-30). "We opened 28 new warehouses, including three relocations, for a total of 25 net new warehouses" (Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Digitally-enabled comparable sales growth: 21.0% (as of 2026-08-30). "Digitally-enabled comparable sales increased 21% during 2026, both as reported and excluding the impact of changes in foreign currencies." (Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Average ticket growth: 5.0% (as of 2026-08-30). "Comparable sales were positively impacted by increases of 5% in average ticket and 3% in shopping frequency." (Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations)
- Shopping frequency growth: 3.0% (as of 2026-08-30). "Comparable sales were positively impacted by increases of 5% in average ticket and 3% in shopping frequency." (Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations)

## Key insights

### Membership fees equal half of operating income

Fees of $5.9B are 1.9% of revenue yet equal 50.6% of operating income, so the membership base, more than merchandise markup, underpins profit.

Membership fees were $5.9B of $303.2B total revenue, 1.9%. Operating income was $11.7B, so fees equal 50.6% of it, against 51.3% the year before ($5.3B of $10.4B). The rest of the business, net sales of $297.2B, ran with merchandise costs at 88.9% of net sales and SG&A at 9.1%. The filing calls the membership format "integral to our business and profitability." _(from the filing)_
The fee base is loyal and weighted to the heaviest shoppers. The renewal rate was 92.3% in the U.S. and Canada and 89.8% worldwide, and Executive members, who pay a higher fee for a reward on qualified purchases, accounted for about 75.2% of worldwide net sales. The filing names new sign-ups, fee increases and Executive upgrades as the drivers of the 11.0% rise in fee revenue. _(from the filing)_
Analysis: the share slipped from 51.3% to 50.6% because operating income grew 12.5% while fees grew 11.0%, so the rest of operating income grew faster than the fee this year. Fees are not a margin: they are set against operating income here only to show how much of the profit they could account for. _(analysis)_

### Canada earns the most profit per dollar of sales

Canada brings 13.4% of revenue but 18.0% of operating income, a 5.2% operating margin against 3.5% for the U.S. segment.

Segment revenue: United States $219.8B (72.5% of the total), Canada $40.6B (13.4%), Other International $42.8B (14.1%). Segment operating income: United States $7.6B (65.4%), Canada $2.1B (18.0%), Other International $1.9B (16.5%). Dividing each segment's operating income by its revenue gives 3.5% for the U.S., 5.2% for Canada and 4.5% for Other International, against 3.85% for the company. _(from the filing)_
The filing does not explain why Canada runs at a higher margin. It does say that certain Other International operations have lower wage and benefit costs as a percentage of sales and less or no direct membership warehouse competition, and that SG&A as a share of net sales rose this year in the Canadian and Other International segments while staying flat in the U.S. _(from the filing)_
Analysis: the U.S. is the volume engine and Canada the most profitable per dollar, so where sales grow shapes the company margin. A dollar of sales in Canada carried more operating income this year than one in the U.S. Segment revenue includes membership fees, so differences in fee levels or renewal patterns by country may also play a part. _(analysis)_

### Cash outruns profit, even after heavier building

Operating cash flow of $15.8B was 1.71 times net income, so $6.4B of capital spending still left $9.4B of free cash flow.

Net cash from operations was $15.8B against $13.3B the year before, and net income $9.2B against $8.1B. Capital spending rose to $6.4B from $5.5B, taking 40.7% of operating cash flow. Free cash flow of $9.4B was above net income, against $7.8B the year before. _(from the filing)_
The filing gives the mechanism: "We often sell inventory before we are required to pay for it, even while taking advantage of early payment discounts." It credits this year's increase to higher operating income and a smaller net investment in merchandise inventories, the result of "faster inventory turns and improved payment terms with suppliers." _(from the filing)_
Analysis: in this model growth tends to release working capital rather than absorb it, and the filing expects capital spending to be financed from operating cash, cash and short-term investments. Part of this year's gain came from better supplier terms and faster turns, which need not repeat, so the gap between cash flow and net income can narrow in a year without them. _(analysis)_

### Gasoline and pharmacy growth reshape the reported margins

Warehouse ancillary and other sales grew 19.9%, to 20.2% of revenue; the filing says this mix held down gross margin while core categories improved.

Warehouse ancillary and other businesses, led by gasoline and pharmacy, grew 19.9% to $61.4B, while Food and Sundries grew 6.6%, Non-Foods 8.7% and Fresh Foods 9.8%. Their share of revenue rose 1.65 points to 20.2%. Gross profit, total revenue less merchandise costs, held at 12.8% of revenue, down 0.02 points. _(from the filing)_
The filing explains the offset: gasoline and pharmacy carry a lower gross margin percentage, so their faster growth pulled the overall rate down, while the gross margin of core merchandise categories, measured on their own sales, rose in every category. Higher gasoline prices also inflated net sales, which the filing says lowers gross margin as a percentage and reduces SG&A as a percentage of net sales. _(from the filing)_
Excluding gasoline price inflation, the filing says SG&A as a share of net sales edged up. So the fall to 9.1% of net sales from 9.25% reflects the gasoline price effect the filing names, not lower warehouse costs. _(from the filing)_
Analysis: the reported ratios move with fuel prices. If gasoline prices fell, the gross margin rate would tend to rise and the SG&A ratio to climb, with no change in how the warehouses perform. The filing describes this inverse effect itself. _(analysis)_

### Competitive edge

- **A fee base that renews at 92.3%** Renewal of 92.3% in the U.S. and Canada, with Executive members at 75.2% of net sales, keeps fee revenue recurring and loyal.
- **A cost structure built to run on thin margins** With SG&A at 9.1% of net sales, Costco can price goods close to cost and still earn a 3.85% operating margin on revenue.
- **Kirkland Signature earns more inside a low-price promise** The private label sells below national-brand prices yet generally earns higher margins, the filing says, and its share of sales is growing.

### What to watch

- **Most profit rests on the U.S. and Canada** The U.S. segment alone earns 65.4% of operating income, and the filing flags California, its higher-volume market, as a particular dependence.
- **Newer members renew less, and fees carry half the profit** Worldwide renewal of 89.8% trails 92.3% in the U.S. and Canada; the filing says online and some international sign-ups renew slightly less.
- **Thin margins leave little room for cost shocks** Net income is 3.0% of revenue, and the filing warns that modest changes in merchandise costs or SG&A can move it substantially.

## Operating income by segment

- United States: $7.6B (65.4% of operating income)
- Canada: $2.1B (18.0% of operating income)
- Other International: $1.9B (16.5% of operating income)

## Investor view

**Costco's $5.9B in membership fees equal half its operating income; the merchandise itself runs close to cost**

### How it makes money

Costco took in $303.2B of total revenue this fiscal year, against $275.2B the year before. Almost all of it, $297.2B or 98.1%, is net sales of merchandise through 939 warehouses and their e-commerce sites. The other $5.9B, 1.9% of revenue, is membership fees. The filing states the model directly: low prices on a limited selection produce high volumes and rapid inventory turnover, which let it "operate profitably at significantly lower gross margins" than most other retailers. _(from the filing)_
The merchandise runs close to cost. Merchandise costs of $264.3B took 88.9% of net sales, and SG&A of $27.2B took another 9.1%. Little is left from selling goods, so the fee carries the profit: membership fees of $5.9B equal 50.6% of the $11.7B operating income. The filing calls the membership format "integral to our business and profitability." _(from the filing)_
The fee base is loyal and concentrated in the best customers. The member renewal rate was 92.3% in the U.S. and Canada and 89.8% worldwide. Executive members, who pay a higher fee and earn a reward on qualified purchases, accounted for about 75.2% of worldwide net sales. Fees are recognized ratably over the membership year, so fee revenue moves with the member base rather than with each month's shopping. _(from the filing)_
The U.S. is the core of the business: $219.8B of segment revenue, 72.5% of the total, with Canada at $40.6B (13.4%) and Other International at $42.8B (14.1%). Around the warehouses sit 774 gas stations, plus pharmacy, food court and optical. The company says its gasoline business "enhances traffic in our warehouses" while generally carrying a lower gross margin percentage than the rest. _(from the filing)_

### What shifted

Profit grew faster than sales. Operating income rose 12.5% to $11.7B and net income 13.9% to $9.2B, against net sales growth of 10.1%. The lever was SG&A, which grew 8.9% and fell to 9.1% of net sales from 9.25%. The filing attributes that drop mainly to higher gasoline prices inflating the sales base; excluding gasoline price inflation, it says SG&A as a share of net sales edged up. _(from the filing)_
Members bought more, not only in new buildings. The filing reports comparable sales lifted by a 5% rise in average ticket and a 3% rise in shopping frequency, with the rest of the growth from 25 net new warehouses, 939 against 914. Digitally-enabled comparable sales rose 21%. _(from the filing)_
Merchandise costs grew 10.2%, a touch faster than net sales, and gross profit slipped 0.02 points as a share of revenue. The filing explains the mix: gasoline and pharmacy grew faster than core merchandise and carry lower margins, while core categories improved their own margin. It also began receiving refunds of tariffs the Supreme Court ruled unlawful, booked as lower merchandise costs, and put part of them into lower prices for members. _(from the filing)_
Below operating income, interest income and other rose 20.7% to $711M from $589M, which the filing ties to higher cash balances, partly offset by lower interest rates. Interest expense fell to $145M from $154M. The tax provision came to 24.7% of pre-tax income, against 25.1% the year before. _(from the filing)_
Cash grew faster than profit. Operating cash flow reached $15.8B against $13.3B, and free cash flow $9.4B against $7.8B, even as capital spending rose to $6.4B from $5.5B. The filing credits higher operating income and a smaller net investment in inventory, the result of "faster inventory turns and improved payment terms with suppliers." _(from the filing)_

### Risks in the filing

The company says it is highly dependent on its U.S. and Canadian operations and, within the U.S., on California, where its warehouses run at higher volume. A sustained slowdown there, whether from weaker comparable sales, rising labor, healthcare and energy costs, new warehouses drawing sales from existing ones, or a shift toward lower-margin goods, would weigh on the whole company. _(from the filing)_
Member loyalty is named as essential: growth in members, Executive penetration and high renewal rates "materially influences our profitability." Damage to the brand, the culture or member trust could reduce renewals, sales and fee revenue together. A loss of confidence in Kirkland Signature, the private label that generally carries higher margins, would hit sales and gross margin. _(from the filing)_
Tariffs, inflation and volatile commodity prices, gasoline included, can raise merchandise costs faster than the company can or chooses to pass them on. It says it may not be able to raise prices enough to offset cost increases without hurting demand, and that higher tariffs could adversely affect results. _(from the filing)_
Competition is broad, from other warehouse clubs to supercenters and online retailers, and the filing adds a newer form of it: AI shopping tools that may change habits, present inaccurate prices, or "fail to capture the full value of our membership offering." It also names IT failures and cyberattacks, which it says would matter most for a business built on member confidence. _(from the filing)_
Of these, the cost risk is the one already visible in the numbers, and it is being managed rather than absent: merchandise costs grew slightly faster than net sales, and the company chose to hand part of its tariff refunds back through prices. The concentration risk shows in the segment split, where the U.S. carries most of the revenue. The membership risk does not show yet: fees grew faster than sales and renewal rates stayed high. _(analysis)_

## Founder view: mechanisms

### Membership fees fund thin merchandise margins

Costco charges an annual fee for the right to shop, then prices goods close to cost. The fee is nearly all margin, because the cost of serving members already sits in merchandise costs and SG&A. That frees the retail operation to act as a pricing tool rather than a profit center, and the low prices are what make the fee worth paying. Each side reinforces the other. _(analysis)_

### A paid upgrade that rewards spending

The Executive tier costs more and returns a reward on qualified purchases, capped each year and redeemable only at Costco. It lets the heaviest shoppers identify themselves, raises what they would lose by leaving, and pulls more of their spending into the warehouse because the reward grows with what they buy there. In the U.S. it also brings exclusive shopping hours. _(analysis)_

### Selling goods before paying for them

A narrow, fast-moving assortment means goods leave the warehouse before the supplier's invoice falls due. Suppliers in effect finance the inventory, so growth releases cash instead of consuming it, and that cash pays for new warehouses without heavy borrowing. _(analysis)_

### Fewer items, bigger orders

Carrying few items, each in large quantity, concentrates purchasing so each order is big enough to win the supplier's best price. It also simplifies the floor: pallets on racks, less handling, fewer staff per dollar of sales. Members accept the narrow choice because each item is a strong deal, and private label fills the gaps where a brand will not price low enough. _(analysis)_

### Low-margin anchors that bring members back

Gasoline, pharmacy, the food court and optical sit inside or beside the warehouse and give members a reason to come more often. They earn thin margins on their own. Their job is the extra trip, on which members also buy merchandise, and a higher return on the membership they already paid for. _(analysis)_

## Member research

Signed-in members read, on the page: what Costco's numbers depend on from here, and the playbook behind each mechanism (what needs scale, what transfers, how to test it, the metric that would show it).

## Sources

- Costco 10-K for the period to 2026-08-30: https://www.sec.gov/Archives/edgar/data/909832/000090983226000093/ (2026-10-07)

Methodology business-lens-1.0 · schema 1.2.0 · run business-lens-2026-11-01 · as of 2026-11-01