How Costco Makes Money

Costco Wholesale Corp. (COST) is a big-box retailer and a wholesale warehouse club operating roughly 800 locations in North America, Asia, and Europe. It also has a major e-commerce operation. The company's warehouses offer low prices on a limited selection of both name brand and private label products, typically offered in bulk volumes.

Customers purchase memberships to access the warehouses and make purchases. Costco aims to offer lower prices than competitors by purchasing merchandise directly from manufacturers, limiting store hours of operation, and minimizing labor by storing merchandise on large racks above a vast, self-service warehouse sales floor.

Costco's core merchandise offerings include: foods and sundries, such as dry grocery, candy, freezer, deli, liquor, and more; non-foods, including major appliances, electronics, health and beauty aids, hardware, automotive care, housewares, jewelry, and more; and fresh foods, such as meat, produce, service deli, and bakery. Costco also offers warehouse ancillary products and services, including gasoline, pharmacy, tire installation, and more.

The discount retailer also generates revenue through its e-commerce business and through membership fees. Costco's main competitors include discount stores such as Target Corp. (TGT) and Walmart Inc. (WMT), as well as big-box rivals like BJ's Wholesale Club Holdings Inc. (BJ). The company also competes with e-commerce retailers like Amazon.com Inc. (AMZN).

Costco's Financials

Costco announced in early March financial results for Q2 of its 2022 fiscal year (FY), the three-month period ended Feb. 13, 2022. Net income attributable to the company's shareholders rose 36.6% compared to the year-ago quarter. Revenue grew 15.9% year over year (YOY) to $51.9 billion. Operating income, which the company uses as a profitability metric for its individual business segments, increased 35.2% YOY to $1.8 billion.

The merchandise category that made the biggest contribution to Costco's revenue during its fiscal second quarter was foods and sundries, comprising nearly 38% of total revenue. Non-foods accounted for 29% of total revenue while fresh foods made up 13% of the total and the company's ancillary and other businesses comprised 18%. Membership fees accounted for about 2% of Costco's revenue.

In its quarterly filings for Q2 FY 2022, Costco noted that the COVID-19 pandemic continued to have an impact on its business. However, it added that the impact was weakening. The company continued to face ongoing supply and logistics constraints, which continue to adversely impact certain merchandise categories.

Costco's Business Segments

Costco divides its business into three reportable segments: United States Operations, Canadian Operations, and Other International Operations. The company provides a breakdown of both revenue and operating income for these three segments.

United States Operations

The bulk of Costco's business comes from its operations in the United States, making this the largest of the company's three reportable segments. For Q2 FY 2022, United States Operations reported roughly $37.6 billion in total revenue, a 16.9% YOY increase. In the same time period, the segment reported $1.2 billion in operating income, a 42.7% YOY increase. In Q2 FY 2022, United States Operations represented 72% of Costco's total revenue and 65% of total operating income.

Canadian Operations

Though significantly smaller than its U.S. operations, Costco still does considerable business through its Canadian Operations segment. This segment reported about $7.0 billion in total revenue for Q2 FY 2022, representing a 16.9% YOY increase. Canadian Operations also posted operating income for the quarter of $301 million, a 33.2% YOY increase. For this quarter, Canadian Operations represented 14% of Costco's total revenue and 17% of the company's operating income.

Other International Operations

Besides the U.S. and Canada, Costco operates membership warehouses in Mexico, the U.K., Japan, Korea, Spain, Australia, France, China, and Iceland. It also operates in Taiwan through a majority-owned subsidiary. This group of countries is represented in the Other International Operations segment. For Q2 FY 2022, Other International Operations generated total revenue of about $7.3 billion, a 10.2% YOY increase. Other International Operations also posted Q2 FY 2022 operating income of $332 million, a 15.3% YOY increase. The segment comprises 14% of revenue and 18% of operating income.

Costco's Recent Developments

In late February 2022, it was reported that Costco was planning to raise its starting hourly wage for store workers to $17.50 in March. For other employees, such as supply chain employees, the starting wage could be as high as $28.50. A number of other large retailers in the U.S. are also raising wages amid strong sales and profit growth.