Costco Wholesale Corporation COST

The business

Costco sells an annual membership. The 931 warehouses, the pallets, the fuel pumps, and the private label are the reason to hold the card rather than the source of the profit, because merchandise is priced at a capped markup by policy. The buyer is a household that shops there because the prices are provably good, and the switching cost is the fee it has already paid.

Payment arrives twice: a thin spread on $69.15 billion of quarterly net sales, capped by that markup policy, and $1.373 billion of membership fees recognized across the year of each membership. Fees grew 10.7% last quarter while net sales grew 11.6%. What changed is the price rather than the mechanics, because the shares sit 13.6% below their high while quarterly earnings per share set a record at $4.93.