Two Halves of One NumberWide moat

The two halves of Costco's operating income have opposite characteristics, and consolidating them into one line hides that.

The merchandise half — $5,060 million in fiscal 2025¹ — is a 1.87% margin on net sales. It is exposed to freight rates, tariffs, currency, gasoline prices, wage inflation and the price of eggs. A 20 basis point move in gross margin, which happens routinely and happened in fiscal 2025, is worth about $540 million, or eleven percent of that half. It is, in short, a normal retail business with all of retail's volatility and none of its margin.

The membership half — $5,323 million — has almost no volatility at all. It is a function of the number of members, the price, and the renewal rate, all three of which move slowly and two of which Costco sets. It carries no cost of goods. It is paid in advance. It grew 10% in fiscal 2025 and 13% across the first thirty-six weeks of fiscal 2026² while the merchandise half grew far more erratically.

Put the two together and you get a company whose reported operating income looks like a stable compounder because half of it is a subscription, and whose retail operations look far less impressive than the headline suggests. Both readings are correct. The reason this matters for a valuation is that the market pays 46 times earnings for the combination, and roughly half of those earnings deserve a subscription multiple while the other half deserve a supermarket's.

What tests the split is membership fees as a share of operating income: 51.3% in fiscal 2025 and 51.5% over three quarters of fiscal 2026³. Rising is good for quality and, past a point, is also a warning — it would mean the merchandise business had stopped earning anything at all, which is exactly what has happened at Sam's Club.