Lesson 8 of 8
Stress testing
Ten basis points of gross margin is worth 270 million dollars at Costco. Ten new warehouses are worth about 56 million. One input matters five times more.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- Change one input at a time and record the effect on operating income, because only then does the ranking mean anything.
- At Costco's fiscal 2025 figures, ten basis points of gross margin is worth about 270 million dollars and ten additional warehouses about 56 million.
- The answer rests on the input the business has least control over, which is the useful and uncomfortable finding a sensitivity produces.
A model's base case is the least interesting thing in it. What a reader needs is the ranking: which assumption, moved by a plausible amount, changes the answer most.
One input at a time, against fiscal 2025 operating income of 10,383 million
- Gross margin, ten basis points$270m
- Selling costs, ten basis points$270m
- Membership fee, one dollar a member$79m
- Ten additional warehouses$56m
Where each figure comes from
Ten basis points of gross margin on net sales of 269,912 million dollars is 269.9 million, which is 2.6 percent of operating income. Ten basis points of selling costs is the same amount in the other direction.
One dollar a year on the membership fee, applied to the average paid membership of 78.6 million, is 78.6 million dollars, and it falls straight through because the income statement shows no cost line against fee revenue.
Ten additional warehouses at the fiscal 2025 rate of 299.2 million dollars of net sales each is 2,992 million of sales. At the 1.87 percentage point spread between gross margin and selling costs, that is about 56 million of operating income.
The ranking, and what it means
A ten basis point move in gross margin is worth nearly five times ten new warehouses. That is not an argument against opening warehouses, which build the base that produces the margin in every later year. It is a statement about where a model's error sits.
A reader who spends a week on the warehouse opening plan and takes the gross margin from last year has optimised the smaller term. The larger term is the one driven by merchandise mix, the fuel price and competitive pricing, none of which the company fully controls and none of which a model can forecast well.
Change one thing, and record it
The discipline is mechanical. Return every input to base, move one, record the effect, return it. A model where two inputs moved together produces a number nobody can attribute, and the whole point of the exercise is attribution.
Then write the ranking down beside the base case, because the ranking is what another person needs in order to disagree usefully. Disagreeing with the third most important input is a conversation about nothing.
The last thing this course says
A model is an argument made arithmetic. What a sensitivity does is state the argument's weakest joint out loud: here is the input that carries the answer, here is how much it has to move to change the conclusion, and here is what the filed record says about how much it has moved in the past.
That last clause is what stops a sensitivity becoming theatre. Costco's gross margin moved from 10.57 to 10.92 to 11.12 percent across three filed years, which is 55 basis points of range. A ten basis point sensitivity is therefore a small move by the standard of the company's own history, and the answer moves 2.6 percent for it.
Check yourself
Which input moves fiscal 2025 operating income most, per plausible unit of change?
- The number of warehouses
- Gross margin: ten basis points is about 270 million dollars, nearly five times ten new warehouses
- The membership fee
Show the answer
Answer: B.
Ten basis points on 269,912 million of net sales is 269.9 million. Ten warehouses at the average, through a 1.87 point spread, is about 56 million.Why does a membership fee increase fall almost entirely to operating income?
- Because membership revenue is taxed differently
- Because the income statement carries no cost line against fee revenue
- Because it is recognised immediately
Show the answer
Answer: B.
The fee is recognised over the membership year and the servicing costs sit inside selling, general and administrative without being separated, so an increase in the fee adds to operating income nearly in full.What makes a sensitivity useful rather than theatrical?
- Testing a wide enough range
- Stating how far the input has actually moved in the filed record, so the size of the test can be judged
- Running every input at once
Show the answer
Answer: B.
A ten basis point test means nothing until you know the measure moved 55 basis points across three filed years. The history is what makes the test plausible or absurd.Sources
- Costco Wholesale Corporation, Form 10-K for the fiscal year ended 31 August 2025, filed 2025-10-08, accession 0000909832-25-000101: net sales, merchandise costs, selling general and administrative expenses, membership fees, operating income, warehouse counts and paid membership, and the discussion of lower initial operating profitability at new warehouses.
What this leaves out
- Every effect in this lesson is this course's arithmetic on filed figures, using fiscal 2025 as the base. None is a forecast and none of it says what any figure will do next.
- The warehouse sensitivity assumes a new location immediately reaches the average sales of the existing estate and carries the average spread. The filing states that new warehouses have lower initial operating profitability, so the first-year effect is smaller than shown.
- A sensitivity ranks inputs by their effect, not by their likelihood. Nothing here says which input is more likely to move.
- Nothing in this course is a view on Costco or on any security, and no lesson in it produces a price.